In depth presentation on considerations for choosing the most beneficial entity for a particular business or financial situation - LLC, Sole Proprietorship, General Partnership, etc. Contact Goldin Peiser & Peiser, LLP for more information or visit www.gppcpa.com.

1. Choice Of Entity And How To
Avoid Personal Liability
Presented by
Rick Lahr, CPA

2. I. Entity Formation Considerations
A. Delaware Advantages
1. Among the most flexible business laws in the country
2. Court of Chancery considered an advantageous venue
for business cases heard by only judges - no juries
3. Franchise tax only for companies not transacting
business within the state
4. Shareholders/directors/officers/members/
managers are not required to be residents

3. I. Entity Formation Considerations
B. Nevada Advantages
1. No state income tax and no fees on corporate
shares
2. No franchise tax or personal income tax
3. Shareholders/directors/officers/members/
managers are not required to be residents

4. I. Entity Formation Considerations
C. Doing Business In Other States
1. Foreign qualification where the entity has
property/payroll/sales
2. Evaluate costs and ongoing fees in any other
state(s)

5. I. Entity Formation Considerations
D. Sole Proprietorship
1. Advantages
a. Simple to create and easy to discontinue
b. Singular decision making authority
c. Minimum compliance required
d. Easily converted, usually without triggering a
taxable event
2. Disadvantages
a. Unlimited personal liability
b. Limited access to capital
c. Most earned income is subject to the self-
employment tax
d. Maximum transparency = increased IRS
examination risk

6. I. Entity Formation Considerations
E. Corporation
1. Advantages
a. Limited liability of shareholders
b. Ability to attract investment capital
c. Multiple classes of stock are permitted
d. Wide range of nontaxable fringe benefits
for shareholders who are employees
2. Disadvantages
a. Formalities must be followed
b. Potential for loss of control
c. Double taxation of income
d. May be subject to the accumulated earnings
tax or personal holding company tax

7. I. Entity Formation Considerations
F. General Partnership
1. Advantages
a. Little governmental regulation
b. Flexibility in management structure
c. Single level of taxation
d. Generally uniform state taxation
2. Disadvantages
a. Unlimited liability of owners
b. Difficulty in attracting outside investment
c. Complexity of applicable law
d. Losses limited to extent of basis

8. I. Entity Formation Considerations
G. Limited Partnership
1. Advantages
a. Limited liability for limited partners
b. Centralized management
c. Single level of taxation
d. Generally uniform state taxation
2. Disadvantages
a. Unlimited liability for general partner(s)
b. Difficulty in transferring ownership
c. Complexity of applicable law
d. Losses limited to extent of basis

9. I. Entity Formation Considerations
H. Limited Liability Company
1. Advantages
a. Limited liability of members
b. Ultimate flexibility in organizational and
management structure
c. Choice of taxation (if requirements met) –
disregarded entity/C corporation/
S corporation/partnership
d. Special allocations (when taxed as a partnership)
2. Disadvantages
a. Potential for loss of control
b. Compliance with applicable laws
c. Complexity (when taxed as a partnership)
d. State taxation issues

10. II. “Piercing The Veil”
A. Effects
1. Owners/shareholders/members can be held personally liable
for business debts
2. Creditors can pursue personal assets
B. Judicial Imposition Of Personal Liability
1. No real separation between the company and its owners
2. Company actions were wrongful
3. Creditors suffered an unjust cost
4. Factors:
a. Fraudulent behavior
b. Failure to follow formalities
c. Inadequate capitalization
d. Commingling of business with personal assets

11. II. “Piercing The Veil”
C. Alter Ego Status
1. Notice CC-2012-002
a. Imposition of liability on an entity by treating
that entity as the taxpayer for tax collection
purposes
b. Analysis of state law to determine what rights a
taxpayer has in property that the Government
seeks to reach
c. Analysis of federal law to determine whether a
state-law right constitutes “property or rights to
property”

12. II. “Piercing The Veil”
C. Alter Ego Status
2. Internal Revenue Manual 5.17.2.5.7.1 (12-
12-2014)
a. Commingling of entity and personal finances
b. Unsecured interest-free loans between the
entity and the owner
c. Taxpayer exerts substantial control over the
entity
d. Entity is undercapitalized relative to its
reasonable anticipated risks of business
e. Failure to observe entity formalities
f. Entity fiction presents an element of
injustice or “fundamental unfairness”

13. II. “Piercing The Veil”
C. Alter Ego Status
3. Oxford Capital Corp v United States, 211 F.3d
280 (5th Cir. 2000)
4. Estate of Strangi v Comm’r, 85 T.C.M. 1331
(2003), aff’d, 417 F.3d 468 (5th Cir. 2005)
5. Area counsel approval is required to issue an
alter ego lien or levy
6. Federal district court suit may be advisable if
there is uncertainty and to establish that the
legally separate entity is an alter ego of the
taxpayer

14. III. Texas Franchise Tax Account
Status
A. Right To Transact Business In Texas
1. Active
2. Active, eligible for termination/withdrawal
3. Forfeited
4. Not established
5. Franchise tax ended
6. Franchise tax involuntarily ended

15. III. Texas Franchise Tax Account
Status
B. Texas Notice Of Intent To Forfeit Right To
Transact Business
1. Entity status forfeited if problems not resolved
within 45 days of the notice date
2. Entity denied the right to sue or defend in a
Texas court (except in a suit to terminate the
entity’s registration with the Texas Secretary of
State)
3. Each officer/ director/ partner/member/
owner is liable for the debts of the entity that
are created before the privileges are revived

16. III. Texas Franchise Tax Account
Status
C. Texas Franchise Tax Public Information Report
D. Texas Franchise Tax Ownership Information Report
E. Annual Statement – Professional Association
F. Periodic Report – Limited Partnership
G. Tax Clearance Letter Request For Reinstatement
H. Request For Certificate Of Account Status To Terminate
A Taxable Entity’s Existence In Texas Or Registration
I. Change Mailing Address/Phone Number For Franchise
Tax Account
J. Change Of Registered Agent And/Or Registered Office

17. III. Texas Franchise Tax Account
Status
K. Registering Out-Of-State Entities To Transact
Business In Texas
1. Failure to register
a. May be enjoined from transacting business in Texas
on application by the attorney general
b. May not maintain an action, suit, or proceeding in a
Texas court until registered
c. Subject to a civil penalty in an amount equal to all
fees and taxes that would have been imposed if the
entity has been registered when first required

18. III. Texas Franchise Tax Account
Status
K. Registering Out-Of-State Entities To Transact
Business In Texas
2. Penalty for late filing
a. Transacted business in Texas for more than
90 days
b. Secretary of State may condition
registration filing on payment of
registration fee for each year, or partial
year, that the entity transacted business in
Texas without being registered

19. If you have any questions
please feel free to contact
Rick at:
214-635-2520
rlahr@gppcpa.com