Attorney Rosh D. Alger, Chair of the Tom Bolt & Associates, PC Corporate and Tax Practice Group recently returned from Pasadena, California where he attended the ALI-ABA Forum on "Representing the Growing Business: Tax, Corporate, Securities, and Accounting Issues."
In recapping the the three day seminar, Alger noted that during the forum, a panel of seven tax and corporate law specialists voted, under a certain fact pattern for a growing business model, to choose the LLC structure. When asked why, six out of seven panelists who voted in favor of the LLC said that they appreciate the flexibility of the LLC.
"Business owners are constantly faced with decisions on how to run their companies. Probably the most basic decision they have to make is choosing the form in which they wish to conduct their business," Alger said. "Should they incorporate now or wait? And if they incorporate now, should it be a C corporation or an S corporation? What about operating as a partnership or a limited liability company?"
"It is clear that there are many factors to weigh before choosing the most appropriate business form," Alger said. "The legal ramifications, the flexibility in the day-to-day operation of the business, and the capital required to establish and run the company are all items that must be addressed."
The panel which included experienced corporate practictioners from many national firms such as Bryan Cave, LLP; Greenberg Traurig, LLP; Venerable, LLP, and Wilmer, Cutler Pickering Hale and Door, LLP all remarked on the tax implications that each business should consider. Will they pay less tax as a partnership or as a corporation? Can they use a fiscal year-end other than December 31 to maximize tax planning? How easy will it be to transfer ownership interests to children, bring in other owners, venture capitalists, and other partners?
The five most common business forms are sole proprietorship, partnership, S corporation, C corporation and the limited liability company (LLC). In most cases, the LLC is treated as partnership for tax purposes. With the issuance of the “check-the-box” regulations, entities can generally elect to designate their tax classification.
The “check-the-box” regulations have simplified the tax election of these entities and the new tax provisions provide to most entities the benefit of one level of taxation. The traditional corporation can now elect to be treated under Subchapter S of the Internal Revenue Code as a pass-through entity (the “S Corporation”) to its owners.
Although, the trend in the regulations and the various legislations of the United States and its possessions is to provide the same benefits to the various types of organizations, they vary in fundamental and significant ways. For example the sole proprietorship and the general partnership do not benefit from limited liability, the corporation is taxed at the corporate level and its shareholders are taxed upon distributions, the S Corporation on the other hand is taxed only at the shareholders’ level, and finally the LLC is either taxed as a partnership, a corporation, an S Corporation or can even be disregarded for tax purposes.