The document discusses different types of business entities and considerations for entity selection including legal liability and tax implications. It outlines sole proprietorships, partnerships, limited liability partnerships, C-corporations, S-corporations, and limited liability companies (LLCs). For each entity, it summarizes costs, complexity, liability protections, and tax treatments to help business owners choose the best structure. The overall goal is to select an entity that shields personal assets from lawsuits while minimizing tax obligations.

1. Presented by
Troy O’Callaghan, CPA, MBA
www.troyocallaghancpa.com
Entity Selection:
Legal Liability
And
Tax Minimization

2. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Legal Liability Considerations
• Business owners should protect their personal assets from lawsuits.
• Forming a separate legal entity can shield the owner from these
lawsuits.
• For example, the owner of real estate places it into an LLC. If the
tenant injures himself and sues the owner, the tenant’s damages
may be limited to the assets in the LLC. The tenant would not be
able to take the owner’s personal assets like a personal residence,
cash account, other investments, etc.

3. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Legal Liability Considerations
• The question is – what are the entity options, and the advantages and
disadvantages of each one?
• Things to consider:
• Cost – choice of entity may incur more costs for initial setup as well as ongoing and year-
end compliance.
• Complexity – some entities require more compliance during the year in order to maintain
entity status.
• Liability – can the owner(s) lose their personal assets in a lawsuit?
• Taxes – entities are taxed differently, and the wrong choice of entity could result in higher
taxes.

4. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Entity Selection – Sole Proprietor
• A business owner starting a business can operate the business without
creating a separate business entity. This is called a sole proprietorship.
• The business and the owner are considered the same person. All assets would
be available to satisfy lawsuits.
• Things to consider:
• Cost – No additional cost to form a sole proprietorship.
• Complexity – No additional complexity.
• Liability – The owner’s personal assets could be used to satisfy a lawsuit.
• Taxes – Income taxes would be paid by the individual taxpayer on a schedule C attached
to Form 1040 - personal return. Taxpayer would be liable for self employment taxes on
profits from the business.

5. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Entity Selection – Partnership
• A business with more than one owner can start a partnership.
• The business and the owners are considered the same person. All assets
would be available to satisfy lawsuits. All partners may be held liable for the
wrongdoing of any other partner.
• Things to consider:
• Cost – A partnership agreement should be reviewed by an attorney but is not required.
• Complexity – Some complexity may result from the manner in which partners are paid.
• Liability – Each owner could be sued, and all personal assets would be used to satisfy
lawsuits.
• Taxes – The business would file an information return to the IRS – Form 1065. The
partnership issues a K-1 to each partner. Each partner would include the income from
their K-1 on their individual tax returns. Earnings are subject to self employment taxes.

6. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Entity Selection – Limited Liability Partnership
• A business with more than one owner can start a partnership, and then
register it as a Limited Liability Partnership with the state of Texas.
• Each partner’s liability is limited to their own activity – not the activity of the
other partners.
• Things to consider:
• Cost – A partnership agreement should be reviewed by an attorney but is not required.
Registering with Texas costs $200 per partner, and renewals are $200 per partner each
year.
• Complexity – Some complexity may result from the manner in which partners are paid.
• Liability – Each partner is only liable for their own activities, not the activities of other
partners.
• Taxes – The business would file an information return to the IRS – Form 1065. The
partnership issues a K-1 to each partner. Each partner would include the income from
their K-1 on their individual tax returns. Earnings are subject to self employment taxes.

7. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Entity Selection - C-Corporations
• A Corporation can be formed by most owners.
• The corporation must have a board of directors and operate as a separate
company from the owners.
• Things to consider:
• Cost – An attorney should assist with the formation of the corporation. Registering with
the state of Texas cost $300.
• Complexity – Board of directors should meet regularly. Meeting minutes should be
documented.
• Liability – The owner(s) personal assets are protected from lawsuits.
• Taxes – Corporation pays income taxes on profits on a Form 1120. Then owner(s) also pay
taxes on dividends received by corporation on their person tax returns. This is called
Double Taxation, and is usually a reason why owners do not choose a C-Corporation.

8. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Entity Selection - S-Corporations
• A Corporation can be formed by most owners. Then an election must be made
on IRS Form 2553 to treat the corporation as a subchapter S Corporation.
• The S-Corporation does not pay income taxes. A reasonable salary is typically
paid to the owner, and additional distributions are treated as dividends.
• Things to consider:
• Cost – An attorney should assist with the formation of the corporation. Registering with
the state of Texas cost $300.
• Complexity – Board of directors should meet regularly. Meeting minutes should be
documented.
• Liability – The owner(s) personal assets are protected from lawsuits.
• Taxes – S-Corporation does not pay taxes. Owner(s) pay include salary on a W-2, and also
report dividends from the S-Corporation on their individual tax return.

9. Troy O’Callaghan, CPA, MBA www.troyocallaghancpa.com
Entity Selection – Limited Liability Company (LLC)
• An LLC is established through the state. In Texas, the annual filing fee is $300. If you do not
pay this each year, the state will dissolve your LLC.
• An LLC is a pass-through entity and does not pay income taxes – it passes the profits to the
owner(s), and the owners pay taxes on their personal returns.
• Things to consider:
• Cost – Many people using an online service like Nolo.com or bizfilings.com, but an attorney should
be used if setting up anything other than a one-member LLC.
• Complexity – Very little additional complexity.
• Liability – The owners(s) assets are protected from lawsuits.
• Taxes – An LLC does not pay income taxes on it’s profit. The profits from an LLC with one owner will
be included on the owner’s individual taxes. An LLC with more than one owner is considered to be
a partnership and has the same requirements as a partnership. Each owner must pay self
employment taxes on their earnings.

10. Presented by
Troy O’Callaghan, CPA, MBA
www.troyocallaghancpa.com
Entity Selection:
Legal Liability
And
Tax Minimization