Why Incorporate
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Roman R. Fichman Esq TheLegalist.com
DISCLAIMER: The following presentation is meant for educational purposes only and is not intended to be legal advice and should not be construed as such. No representation is made as to the accuracy or validity of information contained herein. Roman Fichman is admitted to practice in New York and Connecticut and is not making any representations as to laws in other states. Circular 230 Disclosure: Pursuant to U.S. Treasury Department Regulations, unless otherwise expressly indicated, any federal tax advice contained in this communication, is not intended to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Please consult a qualified professional for any specific tax advise. all images are under a creative commons license with attribution
This presentation will address: * why incorporate? incorporate? * when to incorporate? * the different entities to choose from * new york or delaware? * detailed summary charts forming a business entity is not just a set of papers it's a mind set
Roman Fichman Esq TheLegalist.com
Forming an entity creates a protective wall between the entrepreneur and the outside world and helps anchor the relationship between the founding partners of the enterprise
by w upperhippo
Roman Fichman Esq TheLegalist.com
LIABILITY Lars Hammar by Mr Tickle - Wachoo Wachoo Tribe Congressman
TAXES cayusa
BUSINESS NEEDS Roman Fichman Esq TheLegalist.com
Business Liability Liability resulting from breach of a duty, an obligation arising from an action or a failure to take action, in the normal course of a business. as a business you are liable for: CONTRACTS DEBTS TORTS Roman Fichman Esq TheLegalist.com
Incorporating gives the ability to take advantage of: Business deductions Lower tax rates Tax planning
Roman Fichman Esq TheLegalist.com
by Slightlynorth
Incorporating allows you to: Enter into contracts, open bank account, get credit, have employees, etc. Secure intellectual property Have partners Get investors Sell the Business Instill confidence with customer Roman Fichman Esq TheLegalist.com
By Roman Fichman
Generally, incorporation should occur sooner rather than later If your business is already up and running If you are about to sign a contract or enter into some sort of an obligation If you are exposing yourself to the world If you are creating intellectual property If you are actively cooperating with partners / future co-founders If you need to hire employees If you need to raise capital Roman Fichman Esq TheLegalist.com
The alphabet soup of formation: “C” vs. “S” vs. “LLC” vs. “LLP”
Sole proprietorship General Partnership Limited Partnership Corporation Limited Liability Company
Roman Fichman Esq TheLegalist.com
YOU are the business
therefore, you are personally liable
Can operate under a name other your own name but need to file an assumed name certificate The business income is recorded on your personal income tax return You pay unincorporated business tax (UBT) need to probate upon death
OK for hobbies or for innocuous endeavors that yield insignificant yearly income.
Roman Fichman Esq TheLegalist.com
Can
come into existence by merely cooperating with someone. Can operate under a name but need to register Need to obtain a tax ID No liability protection, pass-through tax and subject to UBT tax Exists only while the original set of partners are together.
Roman Fichman Esq TheLegalist.com
The Good Separate legal entity Limited liability Perpetual Separation of ownership from management Fringe benefits (incentive stock options, business deductions) The Bad Corporate formalities must be observed Risk of undercapitalization May present challenging tax issues Roman Fichman Esq TheLegalist.com
The good Pass through taxation Simple capital structure – only one class of shares Simple management structure – shareholders vote according to their % of ownership The bad Can't have more than 100 shareholders. Can't have a nonresident alien as a shareholder. Can't have more than one class of shares. Can't have a shareholder who is not an individual (except an estate, certain trusts or a “S” corp that wholly owns another “S” corp). Must be careful not to co-mingle personal assets with corporate assets IN NYC “S” corps are subject to the General Corporation Tax.
Investors shy away from “S” corps.
Note: Subchapter “S” needs to be elected, otherwise the default is a “C” Corporation
Roman Fichman Esq TheLegalist.com
The Good Flexible capital structure – many classes of shares Flexible management structure – can be run by a board, officers and/or the shareholders Easiest and most familiar form to investors Clear rules on corporate veil piercing Can easily get acquired or go public The Bad Double Taxation: The Corporation is taxed on profits before dividend distribution to the shareholders which is also taxed Sarbane-Oxley and director liability Formalities must be observed. Roman Fichman Esq TheLegalist.com
Very flexible entity but with flexibility comes complexity Hybrid form of Partnership / Corporation Members own a “member interest” not shares Pass-through tax treatment Members share profits and losses and can allocate profit or losses among themselves Profit and loss can be allocated differently than membership interest
Members and Managers have limited liability. (investors can participate in
management without losing their liability protection)
Flexible capital structure – can have preferred classes of “membership interests” Flexible management structure - managers can operate like a corporation’s board of directors and have different classes of managers Under new IRS rules a LLC can elect to be taxed either as a partnership or as a corporation LLC can own 100% of the shares of a corporation In NY LLCs have to publish their formation In NYC LLCs are subject to the UBT Members who are also managers may be subject to self employment taxes on profits A one member LLC is taxed as a sole proprietorship
Roman Fichman Esq TheLegalist.com
P.C. – Professional Corporation PLLC – Professional Limited Liability Company
Doctors, chiropractors, lawyers, accountants, architects, engineers etc. In New York and some other states all the shareholders / directors / members must have a license and the same type of license Generally, the state licensing department must approve the entity before formation documents can be filed with the secretary of state.
Roman Fichman Esq TheLegalist.com
Why choose Delaware? Very well developed body of corporate law and no jury decisions. Often the annual franchise tax is lower (yearly tax on the shares the corporation issued) One person can be the sole officer, director and shareholder of a company No corporate taxes for non-resident companies Privacy – shareholder information is kept private Any attorney can represent a Delaware company (no need to be admitted in Delaware) Why not choose Delaware You still need to file a foreign entity certificate in New York You still need to pay corporate taxes in the state where you are conducting business Any legal disputes might lead you to court in Delaware which could be geographically inconvenient Why choose New York Because that’s the state where you conduct your business New York also allows one person to act as the sole shareholder, director and officer Privacy – shareholder information is kept private Why not choose New York Ten largest shareholders of a private corporation are personally liable for wages of any of its employees
Roman Fichman Esq TheLegalist.com
SUMMARY: LIABILITY & TAXES Type
Are shareholders and investors personally liable? How are taxes paid?
Sole Proprietorship
Yes.
Business income/profits / losses "pass through" to the “owner “and are reported on the sole proprietor's personal income tax return.
General Partnership
Yes.
Business income/profits / losses "pass through" to the partners and are reported on the general partners' personal income tax returns. Note that a partnership will need to file an informational tax return with the IRS.
Limited Partnership
Business income/profits "pass through" to the A limited partner is not personally liable unless the limited partner is active in the management partners and are reported on the general and limited of the partnership. partners' personal income tax returns. The limited Note that a limited partnership must have at least partnership will need to file an informational tax one general partner who is personally liable for return with the IRS. the business debts and obligations of the partnership.
Corporation
No. Note that the shareholders must confirm to proper corporate practices, not to comingle assets & affairs, properly capitalize to maintain the “corporate veil”
Limited Liability Company
Roman Fichman Esq TheLegalist.com
A "C" corporation is taxed on its profits before dividends are distributed to the shareholders. The shareholders are then taxed on their dividends (this is known as double taxation). An "S" corporation is not subject to double taxation. The profits or losses "pass through" to the shareholders who report them on their individual tax returns.
No . In some states members may be personally Business income/profits / losses "pass through" to the liable up to the extent of their capital investment members of the limited liability company and are in the Company. reported on their individual income tax returns. A LLC will need to file an informational tax return with Members must confirm to proper corporate the IRS. Also note that a LLC can elect to be taxed as a practices, not to comingle assets & affairs, corporation. properly capitalize to maintain the “corporate veil”
The pros and cons of sole proprietorships, Corporations, Partnerships and LLCs Type of Entity Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
“S” Corporation
“C” Corporation
Professional Corporation
Advantages Simple Sole Proprietor reports profit or loss on his/her personal tax return. Simple and inexpensive to create Partners report their share of profit or loss on their personal tax returns Limited partners have limited personal liability for business debts as long as they don't participate in the management of the partnership.
Disadvantages Sole Proprietor personally liable. No tax benefits. Partners personally liable for business debts Can be created merely by cooperating with others General partners personally liable for business debts. Suitable mainly for investment companies such as venture capital firms, private equity etc.
Mostly of interest to licensed professions such as lawyers, doctors, accountants etc. Partners aren't personally liable for the malpractice of other partners Partners report their share of profit or loss on their personal tax returns Owners/shareholders have limited personal liability for business affairs. Simple capital and management structures. Owners report their share of corporate profit or loss on their personal tax returns and can use losses to offset other income.
Partners remain personally liable for many types of business obligations Often limited to licensed professions.
Shareholders have limited personal liability for business affairs. Very flexible capital, corporate and management structures Fringe benefits can be deducted as business expense. Owners can split corporate profit among the owners and the corporation to lower taxes. Shareholders do not have personal liability for malpractice of other shareholders. All the other benefits of a corporation
Can be expensive to maintain (each outstanding share costs money) Paperwork can be burdensome Double Taxation
Limited number of shareholders. Non-resident aliens cannot be shareholders. Only one class of shares. Income must be allocated to shareholders according to their ownership interests
Generally, all shareholders must belong to the same profession. Could be subject to the “qualified personal service corporations" flat federal income tax rate of 35%.
Nonprofit Corporation
Contributions to charitable corporation are tax-deductible The corporation does not pay taxes Fringe benefits can be deducted as business expense
Full tax advantages available only to groups organized for charitable, scientific, educational, literary or religious purposes Property transferred to a non-profit corporation must remain there and upon dissolution must be transferred to another non-profit.
Limited Liability Company
Very flexible. Members have limited personal liability for business affairs Profit and loss can be allocated differently than ownership interests. LLCs can elect to be taxed as a partnership or corporation Similar advantages as a regular limited liability company but for licensed professionals.
Flexibility can result in a very complicated entity. Members are personally liable to the extent of their capital investment Subject to the UBT.
Professional Limited Liability Company
Roman Fichman Esq TheLegalist.com
Generally, all members must belong to the same profession. Similar caveats to a regular LLC.
[email protected] (212) 337 - 9837
Roman Fichman Esq TheLegalist.com
DISCLAIMER: The following presentation is meant for educational purposes only and is not intended to be legal advice and should not be construed as such. No representation is made as to the accuracy or validity of information contained herein. Roman Fichman is admitted to practice in New York and Connecticut and is not making any representations as to laws in other states. Circular 230 Disclosure: Pursuant to U.S. Treasury Department Regulations, unless otherwise expressly indicated, any federal tax advice contained in this communication, is not intended to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Please consult a qualified professional for any specific tax advise. all images are under a creative commons license with attribution
This presentation will address: * why incorporate? incorporate? * when to incorporate? * the different entities to choose from * new york or delaware? * detailed summary charts forming a business entity is not just a set of papers it's a mind set
Roman Fichman Esq TheLegalist.com
Forming an entity creates a protective wall between the entrepreneur and the outside world and helps anchor the relationship between the founding partners of the enterprise
by w upperhippo
Roman Fichman Esq TheLegalist.com
LIABILITY Lars Hammar by Mr Tickle - Wachoo Wachoo Tribe Congressman
TAXES cayusa
BUSINESS NEEDS Roman Fichman Esq TheLegalist.com
Business Liability Liability resulting from breach of a duty, an obligation arising from an action or a failure to take action, in the normal course of a business. as a business you are liable for: CONTRACTS DEBTS TORTS Roman Fichman Esq TheLegalist.com
Incorporating gives the ability to take advantage of: Business deductions Lower tax rates Tax planning
Roman Fichman Esq TheLegalist.com
by Slightlynorth
Incorporating allows you to: Enter into contracts, open bank account, get credit, have employees, etc. Secure intellectual property Have partners Get investors Sell the Business Instill confidence with customer Roman Fichman Esq TheLegalist.com
By Roman Fichman
Generally, incorporation should occur sooner rather than later If your business is already up and running If you are about to sign a contract or enter into some sort of an obligation If you are exposing yourself to the world If you are creating intellectual property If you are actively cooperating with partners / future co-founders If you need to hire employees If you need to raise capital Roman Fichman Esq TheLegalist.com
The alphabet soup of formation: “C” vs. “S” vs. “LLC” vs. “LLP”
Sole proprietorship General Partnership Limited Partnership Corporation Limited Liability Company
Roman Fichman Esq TheLegalist.com
YOU are the business
therefore, you are personally liable
Can operate under a name other your own name but need to file an assumed name certificate The business income is recorded on your personal income tax return You pay unincorporated business tax (UBT) need to probate upon death
OK for hobbies or for innocuous endeavors that yield insignificant yearly income.
Roman Fichman Esq TheLegalist.com
Can
come into existence by merely cooperating with someone. Can operate under a name but need to register Need to obtain a tax ID No liability protection, pass-through tax and subject to UBT tax Exists only while the original set of partners are together.
Roman Fichman Esq TheLegalist.com
The Good Separate legal entity Limited liability Perpetual Separation of ownership from management Fringe benefits (incentive stock options, business deductions) The Bad Corporate formalities must be observed Risk of undercapitalization May present challenging tax issues Roman Fichman Esq TheLegalist.com
The good Pass through taxation Simple capital structure – only one class of shares Simple management structure – shareholders vote according to their % of ownership The bad Can't have more than 100 shareholders. Can't have a nonresident alien as a shareholder. Can't have more than one class of shares. Can't have a shareholder who is not an individual (except an estate, certain trusts or a “S” corp that wholly owns another “S” corp). Must be careful not to co-mingle personal assets with corporate assets IN NYC “S” corps are subject to the General Corporation Tax.
Investors shy away from “S” corps.
Note: Subchapter “S” needs to be elected, otherwise the default is a “C” Corporation
Roman Fichman Esq TheLegalist.com
The Good Flexible capital structure – many classes of shares Flexible management structure – can be run by a board, officers and/or the shareholders Easiest and most familiar form to investors Clear rules on corporate veil piercing Can easily get acquired or go public The Bad Double Taxation: The Corporation is taxed on profits before dividend distribution to the shareholders which is also taxed Sarbane-Oxley and director liability Formalities must be observed. Roman Fichman Esq TheLegalist.com
Very flexible entity but with flexibility comes complexity Hybrid form of Partnership / Corporation Members own a “member interest” not shares Pass-through tax treatment Members share profits and losses and can allocate profit or losses among themselves Profit and loss can be allocated differently than membership interest
Members and Managers have limited liability. (investors can participate in
management without losing their liability protection)
Flexible capital structure – can have preferred classes of “membership interests” Flexible management structure - managers can operate like a corporation’s board of directors and have different classes of managers Under new IRS rules a LLC can elect to be taxed either as a partnership or as a corporation LLC can own 100% of the shares of a corporation In NY LLCs have to publish their formation In NYC LLCs are subject to the UBT Members who are also managers may be subject to self employment taxes on profits A one member LLC is taxed as a sole proprietorship
Roman Fichman Esq TheLegalist.com
P.C. – Professional Corporation PLLC – Professional Limited Liability Company
Doctors, chiropractors, lawyers, accountants, architects, engineers etc. In New York and some other states all the shareholders / directors / members must have a license and the same type of license Generally, the state licensing department must approve the entity before formation documents can be filed with the secretary of state.
Roman Fichman Esq TheLegalist.com
Why choose Delaware? Very well developed body of corporate law and no jury decisions. Often the annual franchise tax is lower (yearly tax on the shares the corporation issued) One person can be the sole officer, director and shareholder of a company No corporate taxes for non-resident companies Privacy – shareholder information is kept private Any attorney can represent a Delaware company (no need to be admitted in Delaware) Why not choose Delaware You still need to file a foreign entity certificate in New York You still need to pay corporate taxes in the state where you are conducting business Any legal disputes might lead you to court in Delaware which could be geographically inconvenient Why choose New York Because that’s the state where you conduct your business New York also allows one person to act as the sole shareholder, director and officer Privacy – shareholder information is kept private Why not choose New York Ten largest shareholders of a private corporation are personally liable for wages of any of its employees
Roman Fichman Esq TheLegalist.com
SUMMARY: LIABILITY & TAXES Type
Are shareholders and investors personally liable? How are taxes paid?
Sole Proprietorship
Yes.
Business income/profits / losses "pass through" to the “owner “and are reported on the sole proprietor's personal income tax return.
General Partnership
Yes.
Business income/profits / losses "pass through" to the partners and are reported on the general partners' personal income tax returns. Note that a partnership will need to file an informational tax return with the IRS.
Limited Partnership
Business income/profits "pass through" to the A limited partner is not personally liable unless the limited partner is active in the management partners and are reported on the general and limited of the partnership. partners' personal income tax returns. The limited Note that a limited partnership must have at least partnership will need to file an informational tax one general partner who is personally liable for return with the IRS. the business debts and obligations of the partnership.
Corporation
No. Note that the shareholders must confirm to proper corporate practices, not to comingle assets & affairs, properly capitalize to maintain the “corporate veil”
Limited Liability Company
Roman Fichman Esq TheLegalist.com
A "C" corporation is taxed on its profits before dividends are distributed to the shareholders. The shareholders are then taxed on their dividends (this is known as double taxation). An "S" corporation is not subject to double taxation. The profits or losses "pass through" to the shareholders who report them on their individual tax returns.
No . In some states members may be personally Business income/profits / losses "pass through" to the liable up to the extent of their capital investment members of the limited liability company and are in the Company. reported on their individual income tax returns. A LLC will need to file an informational tax return with Members must confirm to proper corporate the IRS. Also note that a LLC can elect to be taxed as a practices, not to comingle assets & affairs, corporation. properly capitalize to maintain the “corporate veil”
The pros and cons of sole proprietorships, Corporations, Partnerships and LLCs Type of Entity Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
“S” Corporation
“C” Corporation
Professional Corporation
Advantages Simple Sole Proprietor reports profit or loss on his/her personal tax return. Simple and inexpensive to create Partners report their share of profit or loss on their personal tax returns Limited partners have limited personal liability for business debts as long as they don't participate in the management of the partnership.
Disadvantages Sole Proprietor personally liable. No tax benefits. Partners personally liable for business debts Can be created merely by cooperating with others General partners personally liable for business debts. Suitable mainly for investment companies such as venture capital firms, private equity etc.
Mostly of interest to licensed professions such as lawyers, doctors, accountants etc. Partners aren't personally liable for the malpractice of other partners Partners report their share of profit or loss on their personal tax returns Owners/shareholders have limited personal liability for business affairs. Simple capital and management structures. Owners report their share of corporate profit or loss on their personal tax returns and can use losses to offset other income.
Partners remain personally liable for many types of business obligations Often limited to licensed professions.
Shareholders have limited personal liability for business affairs. Very flexible capital, corporate and management structures Fringe benefits can be deducted as business expense. Owners can split corporate profit among the owners and the corporation to lower taxes. Shareholders do not have personal liability for malpractice of other shareholders. All the other benefits of a corporation
Can be expensive to maintain (each outstanding share costs money) Paperwork can be burdensome Double Taxation
Limited number of shareholders. Non-resident aliens cannot be shareholders. Only one class of shares. Income must be allocated to shareholders according to their ownership interests
Generally, all shareholders must belong to the same profession. Could be subject to the “qualified personal service corporations" flat federal income tax rate of 35%.
Nonprofit Corporation
Contributions to charitable corporation are tax-deductible The corporation does not pay taxes Fringe benefits can be deducted as business expense
Full tax advantages available only to groups organized for charitable, scientific, educational, literary or religious purposes Property transferred to a non-profit corporation must remain there and upon dissolution must be transferred to another non-profit.
Limited Liability Company
Very flexible. Members have limited personal liability for business affairs Profit and loss can be allocated differently than ownership interests. LLCs can elect to be taxed as a partnership or corporation Similar advantages as a regular limited liability company but for licensed professionals.
Flexibility can result in a very complicated entity. Members are personally liable to the extent of their capital investment Subject to the UBT.
Professional Limited Liability Company
Roman Fichman Esq TheLegalist.com
Generally, all members must belong to the same profession. Similar caveats to a regular LLC.
[email protected] (212) 337 - 9837
Roman Fichman Esq TheLegalist.com
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