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Overview of Business Entities

Overview of Business Entities. Scott D. Laufenberg Kerrick Stivers Coyle, PLC. Key Issues in Selecting a Business Entity. Formalities – whether there are legal requirements to create the entity and to maintain it Tax benefits – whether the entity has more favorable tax treatment than others

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Overview of Business Entities

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  1. Overview of Business Entities Scott D. Laufenberg Kerrick Stivers Coyle, PLC

  2. Key Issues in Selecting a Business Entity • Formalities – whether there are legal requirements to create the entity and to maintain it • Tax benefits – whether the entity has more favorable tax treatment than others • Liability protection – i.e., is a owner personally liable for debts of the business?

  3. Common Types of Business Entities • Sole Proprietorships – 1 owner • Partnerships – 2 or more owners called partners • Limited Partnerships – at least 2 owners of which 1 must be a general partner and the other must be a limited partner • Corporations – 1 or more owners called shareholders or stockholders • Limited Liability Companies – 1 or more owners called members

  4. Sole Proprietorships • 1 owner • Often the owner uses an assumed name for the business (e.g., John Doe d/b/a Doe Roofing) • No formalities to create or maintain • Provides great flexibility – i.e., no requirements as to how the business is managed internally • All business income is reported on the owner’s personal income tax returns • No liability protection for the owner

  5. Partnerships • Requires 2 or more partners • Relationship between partners should be based upon a written partnership agreement • Revised Uniform Partnership Act • Addresses issues not include in the partnership agreement • By default, profits are shared equally, but losses are split in proportion to ownership interests • Business profits or losses are reported on Schedule K-1s issued to partners

  6. Partnerships • No liability protection – i.e., the partners are personally liable for the business’s debts • Ends upon the departure or death of a partner • Each partner is an agent of the partnership – i.e., can unilaterally act on behalf of the business unless a third party knows differently

  7. Limited Partnerships (LPs) • Variant of a partnership and a corporation • Requires at least 1 general partner and 1 limited partner • Relationship between general partners and limited partners should be based upon a written partnership agreement • Formalities: • Formed by filing a Certificate of Limited Partnership with the Kentucky Secretary of State and County Clerk • File annual reports with the Kentucky Secretary of State

  8. Limited Partnerships (LPs) • General partners: • Responsible for management • Personally liable for business’s debts • Limited partners: • No right to participate in management • Have limited liability • Can loose limited liability if they actively participate in the business • Business profits or losses are reported on Schedule K-1s issued to partners • LPs are also subject to the Kentucky annual limited liability entity tax based upon Kentucky gross receipts or gross profits (min. of $175)

  9. Officers Directors Shareholders Corporations • Overall structure:

  10. Corporations • Requires 1 or more shareholders • Shareholders have limited liability • Shareholders generally have voting rights but are not actively involved in the day-to-day operation of the business • The Board of Directors is elected annually by the shareholders at the corporation’s annual meeting • The Board of Directors elects the officers to handle the day-to-day operation of the business • The Directors and Officers owe duties to the shareholders and can be personally liable to the shareholders

  11. Corporations • Formalities: • Formed by filing Articles of Incorporation with the Kentucky Secretary of State and County Clerk • File annual reports with the Kentucky Secretary of State • Hold annual shareholder meetings and Board of Directors meetings • The Board of Directors adopts the corporate by-laws, which outline the internal structure of the business

  12. Corporation • Taxation: • C corporation • Corporation pays federal income tax AND • Shareholders pay federal income tax on dividends • RESULT: DOUBLE TAX • S Corporation • Applies to qualifying corporations with 100 or fewer shareholders, and that meet other requirements • Election must be made to obtain this status • Eliminates the corporate level of taxation

  13. Limited Liability Companies (LLCs) • Variant of a partnership and a corporation • Requires at least 1 member • Members have limited liability • Offers unprecedented structural and tax flexibility • Formalities: • Formed by filing Articles of Organization with the Kentucky Secretary of State and County Clerk • File annual reports with the Kentucky Secretary of State • May have annual or special meetings of the members

  14. Limited Liability Companies (LLCs) • Structural flexibility – management options: • Member-managed (like a partnership) • Manager-managed (like a LP) • Corporate-style • Operating Agreement – signed by the members and outlines the internal operating structure of the LLC

  15. Limited Liability Companies (LLCs) • Tax flexibility – are permitted to choose how the LLC will be treated for federal income tax purposes • 1 member – options: • Disregarded entity (default) • C corporation • S corporation • 2 or more members – options: • Partnership (default) • C corporation • S corporation • LLCs are also subject to the Kentucky annual limited liability entity tax based upon Kentucky gross receipts or gross profits (min. of $175)

  16. Planning for the Unexpected: Buy/Sell Agreements • Provide a framework for changes in ownership • Involuntary changes – death, disability, divorce, bankruptcy, etc. • Voluntary changes – retirement, sales to others • Limit the ability of owners to bring in new owners without everyone’s consent • Typically address: • Who can buy • How the value of the ownership interest is calculated

  17. Respect the Entity • Set up accounts in the legal name of the business • File annual reports, if applicable • Hold annual meetings and memorialize with minutes • Do not undermine the time, effort, and expense of setting up the business structure by ignoring it • Failing to respect the entity can result in loss of limited liability for the owners

  18. Resources • Kentucky Secretary of State • http://www.sos.ky.gov • IRS Small Business and Self-Employed Tax Center • http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed • Kentucky Department of Revenue • http://revenue.ky.gov/business/

  19. Questions? • slaufenberg@ksclawfirm.com • 270-782-8160

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