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Flashcards in Entity Selection Deck (8):
1

What are key considerations in entity selection?

(1) Liability to clients, customers, employees, and government; (2) Taxes at federal, state, and local level; (3) Governance; (4) Ownership; (5) Ongoing Administrative Requirements; and (6) Initial formation costs and efficiency

2

What are the five types of entities?

(1) Sole Proprietorship; (2) Partnership; (3) C-Corporation; (4) S-Corporation; and (5) Limited Liability Company

3

Sole Proprietorship

(1) Liability - Weak protections

(2) Taxes - single owner includes income on personal tax

Pay estimated taxes if prior year's NYS/ NYC tax owed >$300 and this year's won't cover 90% of anticipated owed

Returns: Info; must report business income in NYS

(3) Governance - Single owner (not appropriate for bringing on additional parties)

(4) Ownership - Single owner; capital raising is limited

(5) Administrative requirements - Minimal

(6) Initial formation - Cheap

4

Partnerships

(1) Liability - Weak protections

(2) Taxes - Pass through taxation

Owners taxed directly (must have cash for income taxed even if they didn't get it)

Pay estimated taxes if prior year's NYS/ NYC tax owed >$300 and this year's won't cover 90% of anticipated owed

Returns: Info

(3) Governance - Flexible; set forth in partnership agreement

(4) Ownership - Less flexible than LLC/ corporation; permit investment without control

(5) Administrative requirements - Minimal

(6) Initial formation - Cheap, but limited partnerships have publication requirement

5

C-Corporations

(1) Liability - Strong protections

(2) Taxes - corporate level (double taxation)

Tax is on (a) earnings and (b) certain distributions

Fed: Up to 50K (15%); 50-75K (25%); 75K-10m (34%); 10m< (35%)

State: Fixed $25; more for >100K

City: $25 minimum; income-based rate is 8.85%

Estimations: If expected to pay >$500, must guess and pay quarterly

Returns: Tax

(3) Governance - Board of directors and officers; appropriate for complex organizations

(4) Ownership - Multiple classes of stocks allowed; transferable subject to securities law

(5) Administrative requirements - More onerous

(6) Initial formation - Cheap (~$250)

6

S-Corporations

(1) Liability - See C-Corp (Strong)

(2) Taxes - pass through

No federal level taxes
Restrictions/ Elections: (a) No different classes of stock; (b) no more than 100 SHs; (c) must file timely elections (Fed/ NYS)

NYS - Income-based corporate tax replaced by fixed dollar ($5m = $5k)

NYC - General corporate tax remains

Returns: Info

(3) Governance - See C-Corp (Board of directors and officers; appropriate for complex organizations)

(4) Ownership - Limit on number and type of stockholders; transferable subject to securities law

(5) Administrative requirements - See C-Corp (more onerous)

(6) Initial formation - See C-Corp (Cheap - ~$250)

7

Limited Liability Companies

(1) Liability - Strong

(2) Taxes - pass through

Special rules

Fed/ State: Treated as partnership for tax purposes
Single-member LLC: Disregarded and treated as sole proprietorship

Returns: Info

(3) Governance - Highly flexible; set forth in LLC operating agreement; can be member- or manager-managed.

(4) Ownership - Highly flexible; multiple classes of interests allowed; transferable subject to securities law

(5) Administrative requirements - Less onerous, but recordkeeping reqs important

(6) Initial formation - Expensive (~$1,000)

8

What are important tax considerations?

(1) Employer Identification Number (EIN): Must have a bank account if you give wages to ANY employee

(2) Employee tax withholding (Fed/ NYS)

(3) Payroll taxes - employees (SS, Medicare, Unemployment); family; independent contractors (don't have to withhold but must report payments >$600)