September 2010 - Business Law & Order - Thomas D. Hammerschmidt, Jr.


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When forming a business, one of the first decisions an entrepreneur will make is choice of entity. This session will cover the possible legal structures for your business, including liability and tax advantages and disadvantages. Learn the basics of Corporate Formation -Introduction business formation and understand the pros and cons of incorporating in Michigan and Delaware.

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September 2010 - Business Law & Order - Thomas D. Hammerschmidt, Jr.

  1. 1. Ann Arbor SPARK – Business Law & Order September 20, 2010 Tax Considerations on Choice of Entity, Formation and Start-up Operations Thomas D. Hammerschmidt, Jr. Dickinson Wright PLLC
  2. 2. IMPORTANT Tax considerations • Taxation of entity • Taxation of owners on operations • Tax consequences of property transfers to the entity and owner's receipt of ownership interests • Transfers from businesses, liquidations • Employee benefits • Other tax considerations
  3. 3. TYPES OF ENTITIES C Corporation Limited Liability Company S Corporation Individual (sole proprietorship) General Partnership Trust, Non-Profit Corporation Limited Partnership
  4. 4. CHOICE OF ENTITY CONSIDERATIONS • Limited liability • Restrictions on ownership • Transferring ownership interests • "Corporate" governance • Tax considerations
  5. 5. TAXATION OF ENTITY AND OWNERS • Entity-level taxation ("double taxation") • Conduit (pass-through) treatment
  6. 6. TAX ATTRIBUTES OF C CORPORATION • Taxation at entity level • Owners taxed again on dividends • Deduction for owner salaries and bonuses – reasonable compensation • Additional tax returns • No restrictions on ownership • Typically suitable for foreign owners
  7. 7. TAX ATTRIBUTES OF C CORPORATION (continued) • Tax losses in early years; NOLs • Tax-free transfers to corporation • Taxation of sale of owner stock • Tax consequences of liquidation and dissolution
  8. 8. TAX ATTRIBUTES OF S CORPORATION • No entity level taxation; pass-through to shareholders • S corporation losses; shareholder basis issues; loans • Restrictions on ownership; eligible shareholders • Tax-free transfers to corporation • Taxation of sale of owner stock • Tax consequences of liquidation and dissolution
  9. 9. TAX ATTRIBUTES OF PARTNERSHIP (INCLUDING LLC) • No entity level taxation; pass-through to partners • Tax-free transfers of property upon formation • Receipt of partnership interest for services; capital vs. profits interest • No restrictions on ownership • General versus limited partners; basis issues • Typically unsuitable for foreign owners • Passive activity losses and "at risk" limitations • Sale of partnership interests or assets; "hot assets"
  10. 10. TAX ATTRIBUTES OF INDIVIDUAL/ SOLE PROPRIETORSHIP operations • No double-taxation; "Schedule C" reporting • Limited liability; single member LLC vs. sole proprietorship
  11. 11. EMPLOYEE BENEFITS ISSUES • Qualified plans vs. other employee benefits • Non-discrimination rules • Restrictions on 2% partners and S corporation shareholders
  12. 12. OTHER CONSIDERATIONS • Cash vs. accrual basis accounting • Accounting period • State taxation • Sales, use and service taxes
  13. 13. OFFICER/PERSONAL LIABILITY • Federal "responsible person" liability • State (Michigan) officer liability
  14. 14. disclaimer This slide presentation is informational only and was prepared to summarize relevant business and tax considerations relating to entity formation and early business operations. It does not constitute legal or professional advice. You are encouraged to consult with a Dickinson Wright attorney if you have specific questions relating to any of the topics covered in this presentation.
  15. 15. biography and contact information Thomas D. Hammerschmidt, Jr. 734.623.1602 PROFESSIONAL INVOLVEMENT Member, Taxation Sections of the American Bar Association and State Bar of Michigan; Chairman of State and Local Tax Committee, 1990-1992 Member, Michigan Association of Certified Public Accountants, 1981; Member of State and Local Tax Committee, Single Business Tax Subcommittee Chairman, 1991-1996 PUBLICATIONS AND PRESENTATIONS Frequent speaker, Michigan Association of Certified Public Accountants' annual conferences and seminars on state tax matters American Bar Association Section of Taxation, Contributing author, “State and Local Taxation of Banks and Other Financial Institutions," 1995 The Tax Executive, co-author, “Michigan Nexus Developments”, March 1995 Michigan Bar Journal, “Resolving Michigan Tax Disputes," 1992 Lorman Education Services, co-author and speaker, "Michigan Sales & Use Tax," 1989- 1995 Wayne Law Review, “Annual Surveys of Michigan Tax Law,” 1988-1991