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 activities, including the advantages and disadvantages of each type of entity in terms of limited liability, management of the business, employee compensation and tax matters. Learn the basics of Corporate Formation and understand the pros and cons of incorporating in Michigan and Delaware.

1. Ann Arbor SPARK –
Business Law & Order
September 19, 2011
Tax Considerations on
Choice of Entity, Formation and Start-up Operations
Thomas D. Hammerschmidt, Jr.
Dickinson Wright PLLC
thammerschmidt@dickinsonwright.com

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. TYPES OF ENTITIES
C Corporation Limited Liability Company
S Corporation Individual (sole proprietorship)
General Partnership Trust, Non-Profit Corporation
Limited Partnership Low Profit LLC (L3C)

4. CHOICE OF ENTITY CONSIDERATIONS
• Limited liability
• Restrictions on ownership
• Transferring ownership interests
• "Corporate" governance
• Tax considerations

5. TAXATION OF ENTITY AND OWNERS
• Entity-level taxation
("double taxation")
• Conduit (pass-through) treatment

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. 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. 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. 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. TAX ATTRIBUTES OF INDIVIDUAL/
SOLE PROPRIETORSHIP operations
• No double-taxation; "Schedule C" reporting
• Limited liability; single member LLC vs. sole proprietorship

11. NON-PROFIT ENTITIES
• Formation under State law
• Federal and state tax exemption
• Charities and other tax-exempt entities

12. EMPLOYEE BENEFITS ISSUES
• Qualified plans vs. other employee benefits
• Non-discrimination rules
• Restrictions on 2% partners and S corporation shareholders

13. OTHER CONSIDERATIONS
• Cash vs. accrual basis accounting
• Accounting period
• State taxation
• Sales, use and service taxes
• Independent contractor versus employee

14. OFFICER/PERSONAL LIABILITY
• Federal "responsible person" liability
• State (Michigan) officer liability

15. 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.

16. biography and contact information
Thomas D. Hammerschmidt, Jr.
thammerschmidt@dickinsonwright.com
734.623.1602
Since graduating from Eastern Michigan University in 1975 with a degree in Business Administration, and law
school from Wayne State University in 1978, Mr. Hammerschmidt has worked as a certified public
accountant and a tax and business lawyer at Dickinson Wright. Based in Dickinson Wright’s Ann Arbor
office, Mr. Hammerschmidt regularly advises individuals and business entities of all sizes on tax issues
arising in connection with business formation, mergers and acquisitions, investments and financial
transactions, business operations, cross-border transactions and dissolution. Mr. Hammerschmidt is a
frequent speaker on these topics, including at Michigan Association of Certified Public Accountants
conferences and for Ann Arbor SPARK.