| With a check of the box, business owners can | | | | when a different entity is more appropriate. |
| choose a tax structure with enormous financial | | | | 2. Do you Have the Time or the Temperament to |
| repercussions both now and in the future. Or, they can | | | | Observe Corporate Formalities? |
| find themselves in a situation where corporate | | | | Second, business owners should consider how their |
| formalities were not observed, thereby opening the | | | | business operates and what business structure would |
| door to personal liability. The choice of business entity | | | | be the best fit for their particular needs. Constantly, |
| is clearly very important. So, is there an easy answer | | | | small business owners are failing to observe corporate |
| to which entity would be best from a legal, tax, and | | | | formalities by maintaining corporate minutes, resolutions, |
| business standpoint? Unfortunately, no. Which entity to | | | | and other records. In some cases, this may be |
| select will depend on a plethora of factors, including the | | | | exposing owners of businesses to liability for litigants |
| decision to issue securities, the desire to attract | | | | who seek to "pierce the corporate veil" and reach |
| investment, the business' management structure, | | | | shareholders directly. In some cases, business owners |
| estate planning goals, the number and type of | | | | are doing themselves an enormous favor by choosing |
| employees, the forms of employee compensation, and | | | | a legal entity that requires minimal corporate formalities. |
| the near and long term potential for profit and losses. In | | | | With an LLC, for instance, a business operating |
| this article, we discuss three major points that business | | | | agreement can be customized to the business' |
| owners should touch upon when considering a choice | | | | particular needs. It is a rare member-manager who |
| of entity. | | | | wishes to maintain each and every corporate |
| 1. Two Levels of Taxation, or One? | | | | formality, and that's not a problem with an LLC. The |
| First, business owners should consider what the | | | | operating agreement may specify that certain records |
| effects will be of corporate level taxation. It is | | | | need not be kept. This can save owner-managers a |
| commonly stated that S Corporations, partnerships, | | | | lot of time and money in producing corporate records. |
| and certain LLCs are superior to C Corporations | | | | It also can prevent veil piercing by litigants. |
| because they offer "pass-through" tax treatment- i.e., | | | | 3. Money |
| one layer of tax. This is true in many cases: thanks to | | | | Third, business owners also need to consider the |
| one layer of tax, shareholders or members of | | | | money. Are there current profits or losses? If there |
| pass-through entities often pay much less tax than C | | | | are multiple owners, would one owner benefit from |
| Corporation shareholders. | | | | recognizing losses, while the other could stand to |
| Proponents of C Corporations often counter by citing | | | | recognize more gain? What is the long term potential |
| the deductions which are available to the corporation | | | | for profits and losses? These issues will heavily |
| for employee wages, or the current low rates of | | | | influence the ultimate choice of entity. With an LLC, for |
| capital gains taxation available to shareholders. The tax | | | | instance, members can recognize both pass through |
| structure could also be seen as an incentive to hold | | | | gains and losses. The operating agreement can also |
| profits at the corporate level to support growth and | | | | be customized to allocate gain to one member, and |
| re-investment. However, the IRS has tools to | | | | loss to another. |
| discourage the payment of unreasonably high wages | | | | IRS CIRCULAR 230 DISCLOSURE: To ensure |
| for tax advantage in a C Corp, just as they have tools | | | | compliance with requirements imposed by the IRS, we |
| to discourage unreasonably high distributions in an S | | | | inform you that any U.S. tax advice contained in this |
| Corp. Also, there is no guarantee that long term capital | | | | communication (including any attachments) is not |
| gains rates will remain low. A C Corporation may be a | | | | intended or written to be used, and cannot be used, for |
| superior entity for attracting investment, but the use of | | | | the purpose of (i) avoiding penalties under the Internal |
| other entities early on in the business' life should not be | | | | Revenue Code or (ii) promoting, marketing or |
| overlooked. Ultimately, it may be a loser's game to try | | | | recommending to another party any transaction or |
| to manipulate the tax system to make a C Corp work | | | | matter addressed herein. |