Presented October 15, 2014 - Professional Development Series - Business and Corporate Law Section of the Idaho State Bar

1. CHOICE OF BUSINESS ENTITY: TO
LLC, OR NOT TO LLC, THAT IS THE
QUESTION
David S. Jensen
October 15, 2014
parsonsbehle.com
ISB Business and Corporate Law Section
Professional Development Series

2. 2
 It’s all LLCs nowadays.
 But should be?
Choice of Business Entity

3. 3
 What are the choices?
• Sole Proprietorship
• General Partnership
• Limited Liability Partnership (LLP)
• Limited Partnership (LP)
• Limited Liability Limited Partnership (LLLP)
• Limited Liability Company (LLC)
• S Corporation
• C Corporation

4. 4
 Sole Proprietorship
• Most Common Business Entity
• Simplest Business Entity
• No registration or filing required for formation
• Proprietor has total control
• No liability protection
• Income and expenses reported on proprietor's tax return
• Must pay self employment tax
• Liquidation not taxable unless any gain from sale of assets

5. 5
 General Partnership
• An association of two or more persons to carry on as co-owners
a business for profit
• Default business entity for two or more persons
• No registration or filing required for formation
• No partnership agreement required, but almost always a good
idea
• A partnership is an entity distinct from its partners
• Any one partner can bind the partnership

6. 6
 General Partnership (continued)
• No liability protection, all general partners are jointly
and severally liable for the obligations of the
partnership
• Income and losses passed through to partners
• Each partner must pay self employment tax on the
partner's share of the partnership ordinary income
• Liquidation can be non-taxable in many situations if
structured properly

7. 7
 Limited Liability Partnership
• Protection against personal liability
• Filing required
• Statement of Authority available
• Otherwise like general partnership

8. 8
 Limited Partnership
• Must have at least one general partner and one limited partner
• Certificate of limited partnership must be filed for formation
• No partnership agreement required, but almost always a good
idea
• Any general partner can bind the partnership
• Each general partner is fully liable for the partnership obligations
• Each limited partner is shielded from personal liability
• Taxed as a partnership
• Limited partners do not pay self employment tax
• Liquidation can be non-taxable in many situations if structured
properly

9. 9
 Limited Liability Limited Partnership
• Protection against personal liability added for general
partners
• Otherwise like limited partnership

10. 10
 Limited Liability Company
• Only one member necessary
• Must file certificate of organization to form
• No operating agreement required, but always a good
idea with two or more members
• Authorized member or manager can bind the LLC
• Members shielded from liability
• Taxed as a partnership unless elect to be taxed as a
corporation
• Liquidation can be non-taxable if properly structured
• Series LLC available in some states

11. 11
 C Corporation
• Articles of incorporation must be filed to form
• Bylaws are required
• Managed by board of directors
• Authorized persons (officers) can bind the corporation
• Shareholders shielded from liability
• Income subject to tax and any dividend distributions to
shareholders taxable to the shareholders
• Losses remain in the corporation
• No self-employment tax
• Any liquidation will probably be taxable

12. 12
 S Corporation
• No more than 100 shareholders
• Only individuals may be shareholders (with a few
exceptions)
• May only have one class of stock
• Must elect S status
• Income and losses passed through to shareholders
based on stock ownership

13. 13
 Other Entities
• Trust
• Statutory Trust
• Unincorporated nonprofit association
• Nonprofit corporation
• Limited cooperative association

14. 14
 What is the objective for the entity?
• Is it a low risk business?
• Will it need additional investors?
• Will it quickly generate net profits?
• Will it have employees right away?
• Is it to implement estate planning objectives?

15. 15
 Why choose an LLC over a C Corporation
• Single level of tax
• Losses generally pass through to the members
• Tax-free distributions of appreciated property
• Appreciated property can be contributed tax-free
• Basis step-up for income left in the LLC

16. 16
 Why choose a C corporation over an LLC
• Many investors don't like LLCs - will not invest if they will
receive a K-1
• Some investors unable to invest in an LLC
• Retention of earnings can be more difficult
• Avoid possible taxation in multiple states
• Equity compensation is easier
• Operating agreement difficult to draft for multiple rounds of
raising capital
• LLC interests not eligible for qualified small business stock
status under Section 1202
• Avoid self-employment taxes
• Tax rates for C corporation can be lower than individual rates

17. 17
 Why choose an S corporation over an
LLC
• S corporations can participate in tax-free
reorganizations – exit strategy advantage
• S corporations can do traditional equity
compensation
• Typically easier to convert to a C Corporation
• Self-employment tax savings

18. 18
 Why choose an LLC over an S
Corporation
• No limit on type and number of owners
• Flexible allocation of tax attributes
• Tax-free distributions of appreciated property
• Appreciated property can be contributed tax-free
• Basis step-up for income left in the LLC

19. 19
 Why choose an S corporation over a C
corporation
• Single level of tax
• Losses generally pass through to the shareholders

20. 20
 Why choose a C corporation over an S
corporation
• Convertible preferred stock can be issued
• No K-1
• Retention of earnings easier
• Eligible for qualified small business stock benefits
• No limit on the type or number of shareholders
• Avoid multiple state tax returns
• Only C corporations can go public
• Double taxation rarely happens with start-ups

21. 21
 David S. Jensen | Attorney at Law
800 W. Main Street, Suite 1300 | Boise, Idaho 83702
Main 208.562.4900 | Direct 208.562.4904
parsonsbehle.com