Business Planning

Call Us Today For A Consultation Regarding Your Business Planning Needs: 850-271-1596

WHY SHOULD YOU FORM A BUSINESS ENTITY?

To start a business, all one needs to do is just that, start operating your business enterprise. So why bother? Four important reasons immediately come to light:

1) Protection of personal assets (limited liability);

2) Favorable tax treatment;

3) An opportunity to clearly define the duties and responsibilities of the owners; and

4) Added credibility with those you do business with.

Call my firm for a consultation to discuss how and which business entity may best serve you. Below, is a brief summary on which entity may be best for you.

In selecting the most favorable business entity to form, numerous considerations should be made including nature of the business, management flexibility and compatibility, limited liability for the participants, tax consequences, access to financing and compatibility with likely liquidity/exit strategies.

SOME ADVANTAGES AND DISADVANTAGES OF EACH FORM

"C" Corporations

Advantages:

• Time tested
• Limited Liability
• Lowest marginal tax rate on earnings
• No shareholder taxation on undistributed profits
• Stock as acquisition currency

Disadvantages:

• Relatively rigid management structure
• Relatively onerous corporate formalities
• Multiple levels of taxation
• Distributions of appreciated property are taxable
• No flow through of tax losses
• No special allocations
• Subject to many potential traps not applicable to partnerships
• Relatively strict property contribution rule

"S" Corporations

Advantages:

• Time tested
• Limited Liability
• Flow through of profits and losses
• Minimization of self employment taxes (relative to partnerships)

Disadvantages:

• Relatively rigid management structure • Relatively onerous corporate formalities
• Only 100 shareholders permissible
• Limitations on who may be a shareholder
• May only have one class of economic stock
• No special allocations • Losses funded by 3rd party debt effectively nondeductable
• Distributions of appreciated property are taxable
• Tax leakage
• Relatively strict property contribution rule

Partnerships

Advantages:

• Unlimited number and character of participants (subject to "publicly traded partnership" rules)
• Flow through profits and losses
• May use special allocations and distributions
• Debt funded losses deductible by partners
• Distributions of property generally are non-taxable
• Relatively friendly property contribution provisions
• Basis step up available to acquiror
• Avoidance of numerous traps applicable only to corporations

Disadvantages:

• Capital accounting is complex and difficult to explain and understand
• Self Employment taxes applicable to service partners
• Tax leakage
• Unavailability fo reorganization provisions
• Potential "hot assets" issues
• Not friendly to foreign investors

Limited Liability Companies

Advantages:

• Maximum management and operational flexibility
• Members can manage the LLC without being personally liable for the LLC's debt
• Minimal formalities
• Ease of formation
• Limited liability for all members
• Choice of entity for income tax purposes:
  Multiple members: - Partnership - Corporation
  Single Member: - Corporation - Disregarded entity

Disadvantages:

• Limited case law defining legals rights and duties
• Distributions may be subject to self employment taxation
• Member withdrawal or assignment of interest can cause dissolution