Deciding on the best legal and tax structure for your company requires:

• Considering the legal ramifications of types of entities;
• Which type of entity has the lowest overall tax burden;
• Ease of management;
• Maximum protection from debts and creditors; and
• Special needs for your particular type of business or industry.

When a client comes in and requests assistance in forming a new venture, there are many options to discuss. Options for the new venture can include: a C corporation; an S corporation; a limited liability company (LLC); a limited partnership; tenancy in common; or a general partnership.

1. What assets and liabilities will be contributed, if any, at the formation of the partnership? For example, where Investor A contributes highly appreciated depreciable assets and Investor B contributes cash, partnership law requires that all of the pre-contribution gain be allocated to Investor A as 704c gain. However, an S Corporation would not require such an allocation of gain to Investor A. This is particularly important when Investor A will be bought out in less than 7 years from the venture. Further, the member contributing property to an LLC would find that he or she may receive a lesser share of depreciation deductions, to offset the contribution of cash by Investor B. This is not so with an S Corporation.
2. What is the tax impact on a subsequent contribution to the entity? For example, subsequent contributions by members can cause the holding period for that portion of the LLC to restart and cause short term capital gain on its subsequent sale. This action can also trigger a deemed distribution of cash upon release of debt by the entry of a new member. Subsequent contributions to an S Corporation may not be tax deferred.
3. How does the type of entity affect Compensation, Profits and Self-Employment Taxes? An S corporation shareholder's distributive share of income or loss is not subject to self-employment tax, unlike an LLC member's distributive share, depending on the member's role in the LLC. Guaranteed payments that represent compensation for services and the distributive share of profits and losses of an LLC member (who meets the definition of a general partner, e.g. managing members) are subject to self-employment tax. Members that are the equivalent of a limited partner, e.g. non-managing member, only include the guaranteed payments for services in the self-employment tax computation.
4. What is the difference in tax impact on Purchase of Ownership Interest of a Withdrawing Owner? For an entity that owns depreciable assets, the choice of S Corporation versus LLC will be significant in a number of areas, especially the tax impact on the purchase of the ownership interest of a withdrawing Owner. The LLC member will receive as income his or her proportionate depreciation recapture on a purchase by another owner. An S Corporation shareholder will generally be taxed at capital gain rates.
5. What are the Differences in Profit Allocation for LLCs and S Corporations? LLCs can allocate profit and losses to take advantage of its members' different objectives and tax rates. S corporations cannot.

How can Advisors in Accounting Firms and Law Firms ensure that all angles of forming an entity are being considered for the best tax consequences for the owners? Contact us today. Our attorneys will work with you and your clients to consider all of the venture options for the best tax consequences for the owners.