Selecting the right entity at the outset of a business establishment will determine the consequences of the tax implications of operating and generating revenue. Depending on which entity is chosen, there may be several tax advantages and liabilities associated with an entity.
i) There are several types of entities that an entrepreneur can form based on their intended purpose:
- C Corporation
- S Corporation
- Partnership
- Limited Liability Company
- Limited Liability Partnership
- Business Trust
- Sole Proprietorship
ii) Choice of Entity Chart describing basic structure, tax implications, and liabilities.
Basic Structure:
Yes |
Yes |
Unlimited liability for general partners. Limited Liability for limited partners, unless limited partner lose the shield by acting similar to a general partner involved in management |
Yes |
Yes, generally the same as a director of a sharehold in a corporation |
Unlimited liability |
No restriction |
Max. 100 |
At least 2 |
at least 2, unless a "disregarded entity" for tax purposes |
At least 2, unless a "disregarded entity" for tax purposes |
Only 1 |
No limitations |
No corporation, LLC, partnerships, or nonresident aliens, or certain trust except that another S corporation can be an owner. |
No limitation |
No limitations, nonresident alien can be a owner |
No limitations |
Individuals only and trusts. |
Yes |
No, but owners can have different voting rights. |
Yes |
Yes, Same as partnerships, general member or limited member, and they can be classified and given different roles |
Yes. Same as partnerships |
N/A - only 1 owner |
perpetual unless stated otherwise |
Same as C Corp |
Depends on majority of remaining partners must agree to continue the partnership if partner or partners disassociate, or it was not for term of life, or for a particular undertaking |
Yes, if the operating agreement provides that the LLC is not dissolved following a member's cessation, or for not a certain period of time. |
Yes |
No |
Yes |
Yes |
No for general partnership; usually yes for limtied partnership |
Depends, the LLC may have a structure based on member managed or manager-managed models |
Yes, unless otherwise provided in the governing instrument, trustees have similar powers and responibilities as directors in a corporation. |
N/A - only 1 owner |
Moderate |
High |
Moderate; depending on complexity of partnership agreement and special allocation of distributino and voting rights |
Moderate and same as partnership depending on the structure |
High |
Low |
Tax Implications:
Taxable unless transferors meet an 80% control test. Subject to diversification limitation |
Same as C Corp |
Generally nontaxable unless "disguised sale." Subject to diversification limitations |
Same as Parntership |
Same as Partnership |
N/A |
Yes |
No, unless too much pasive income or built-in gains |
No |
No |
No |
NO |
35% |
25% on built-in gain and excess passive income if formerly a C corp |
25% at parnter level |
Same as Parntership for a member |
25% at beneficial owner level |
35% |
First $100,000 may be subject to lower rates |
No |
No |
No |
No |
No. |
Taxation on divident to extent of Earnings; then non-taxable to extent of basis |
Non taxable to extent of basis |
Non-taxable to extent of basis in partnership interest |
Non-taxable to extent of basis in LLC interest |
Non taxable to extent of basis in trust units |
N/A |
Depends on the property, it may be taxable to both the corporation and shareholder |
Depends on appreciation, corporation may pay tax, but shareholder may not |
Depends on whether it is an "unequal distrubtion" of "hot assets" |
Similar to Partnership |
Similar to Partnership |
N/A |
N/A |
Generally no but may be a problem if unreasonable low compensation. Law changes in 2013 and high income taxpayers who will be taxed on passive income |
Yes for general partners. Implications of 2013 law changes to passive income |
No clear for LLC members. |
Change of law in 2013 will have implications |
Similar implications of law changes in 2013. |
Liabilities:
Taxable unless transferors meet an 80% control test. Subject to diversification limitation |
Same as C Corp |
Generally nontaxable unless "disguised sale." Subject to diversification limitations |
Same as Parntership |
Same as Partnership |
N/A |
Yes |
No, unless too much pasive income or built-in gains |
No |
No |
No |
NO |
35% |
25% on built-in gain and excess passive income if formerly a C corp |
25% at parnter level |
Same as Parntership for a member |
25% at beneficial owner level |
35% |
First $100,000 may be subject to lower rates |
No |
No |
No |
No |
No. |
Taxation on divident to extent of Earnings; then non-taxable to extent of basis |
Non taxable to extent of basis |
Non-taxable to extent of basis in partnership interest |
Non-taxable to extent of basis in LLC interest |
Non taxable to extent of basis in trust units |
N/A |
Depends on the property, it may be taxable to both the corporation and shareholder |
Depends on appreciation, corporation may pay tax, but shareholder may not |
Depends on whether it is an "unequal distrubtion" of "hot assets" |
Similar to Partnership |
Similar to Partnership |
N/A |
N/A |
Generally no but may be a problem if unreasonable low compensation. Law changes in 2013 and high income taxpayers who will be taxed on passive income |
Yes for general partners. Implications of 2013 law changes to passive income |
No clear for LLC members. |
Change of law in 2013 will have implications |
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