Chapter 5 The Choice of Organizational Form
Outline
(last updated 06 Sep 06)
Chapter 5 The Choice of Organizational Form
A. Introduction
· Partnership
o General partnership (GP)
o Limited partnership (LP)
o Limited liability partnership (LLP)
o Limited liability limited partnership (LLLP)
· Corporation
· Limited liability company
B. Non-Tax Aspects
1. Formation
2. Limited liability
3. Management and control
4. Continuity of existence
5. Transferability of interests
C. Planning Considerations
1. Balancing ownership interests
2. the economics of the choice
D. The Tax Consequences of the Choice: A Brief Examination
1. Partnership vs. Corporation
2. Avoiding Corporate Double Tax
o Subchapter S
o Zeroing Out Income
Class Notes
A. IntroductionTYPES OF BUSINESS - Fundamental Choices
Pinson inherits the family pin-making business and he has grand ideas. He wants to expand and considers his options. He has learned that Aunt Irma has come into a small fortune, and she might be interested in putting some of her money in his business. What are Pinson's choices for a legal relationship with Irma? / (1) General Partnership - co-owners, co-agents
· Irma and Pinson are partners (unlimited liability)
· agreement specifies roles
(2) Limited liability partnership – same as general partnership but with some limited liability
· Irma and Pinson are partners, but they have limited liability (unless their acts or supervision of another makes them liable)
· agreement specifies roles
(3) Limited Partnership- co-owners, but not co-agents
· Irma is limited partner (limited liability) and Pinson is general partner (management and unlimited liability)
· agreement can specify roles, but if Irma takes on too much management authority, she loses ltd liability
(4) Limited liability limited partnership (LLLP) – same as limited partnership, but with limited liability
· Irma is limited partner (non-management) and Pinson is general partner (management) - both have limited liability
· agreement can specify roles
(5) Limited liability company - co-owners and co-agents (if member-managed) OR central management (if manager-managed)
· Irma and Pinson are members (ltd liability)
· operating agreement specifies roles
(6) Corporation - shareholder/manager
· Irma owns shares (some oversight; ltd liability)
· Pinson manages business (ltd liability)
B. Non-tax aspects & Planning considerations
Choice of entity
[* mandatory, parties cannot agree otherwise]
Form / Financial / Tax / Voting / Mgmt / Liquidity / Liability / Change
Partnership
General partnership / association
* / share
profits / pass
through / equal / equal
/ agent / No / joint/sev *
LLP-ltd liab
(liability if supervise) / all
agree
Limited partnership / filing
* / share
profits / pass
through / contract / Ltd-limited
Genl-manage / Ltd-Yes
Genl-No / Ltd-LL
Genl-indiv / majority
Corporation
CCorporation / filing
* / dividends / income
* / directors*
fund'tal tx* / board
* / Yes / limited / majority
*
S Corporation (close) / filing
* / dividends
salaries / pass
through / directors
fund'tal tx / board / No
(agreement) / limited
(PCV*) / majority
Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."
Member -managed / filing
* / equal
distributions / pass
through / equal / equal /
agent / No / limited
(PCV*) / majority
Manager-managed / filing
* / equal
distributions / pass
through / equal / manager / No / limited
(PCV*) / majority
D. The tax consequence of the choice
For an explanation of how corporate income tax produces double taxation,
as well as the advantages and disadvantages of pass-through tax entities, see --
[double tax spreadsheet]
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Chapter 5 – The Choice of Organizational Form