Whether you wish to start a new business, or your current business is growing or ready for sale, proper legal guidance is essential.
When starting a new business, the selection of the appropriate type of entity and crafting such entity to suit your needs is a fundamental decision with significant consequences. At the broadest level, the first decision is the type of entity – does a sole proprietorship, partnership, limited liability company, or corporation have the structural characteristics best suited for your particular venture? The next step is to select from within these basic categories. For example, if a partnership structure is desired, consider the possibility of a joint venture – a partnership whose partners are corporations. Perhaps a limited partnership would better suit your needs, combining a flexible partnership arrangement with the limited liability characteristics of a corporation, similar to a limited liability company. If a corporation is the better option, consider whether an election should be made under subchapter S of the Internal Revenue Code. In addition, certain business purposes and/or professions may eliminate or increase the entity’s options for legal recognition.
The limited liability aspects of limited liability companies make them perfectly suited for holding rental real estate. In New York City, a limited liability company is the entity of choice because it avoids the New York City corporate level taxes imposed upon S corporations. Transferring a deed directly into the LLC is a relatively straightforward, simple process. In addition, the transaction may be structured as a mere change of identity, avoiding transfer taxes. The LLC structure may also be beneficial for business succession planning. In the context of like kind exchanges, under IRC Section 1031, the Internal Revenue Service has issued private letter rulings which confirm that property may be placed into a single member LLC and still qualify as a like kind exchange. As a disregarded entity, the single member LLC is a permitted holder of the replacement property.
The selection process considerations are many, and vary from the simple cost of establishing the entity and annual maintenance, to very complex tax issues. Often the selection is dictated by local state law and federal law.
Factors impacting choice of entity:
- How can the income taxes of the business enterprise (or investment activity) be either minimized or deferred (or both)?
- How can any business enterprise’s tax losses (or investment losses) be advantageously used (particularly, to offset other entity level income, and furthermore to reduce income of the owners of the business enterprise)?
- How can increases in the value of the equity of the business best be protected from income and estate tax liabilities?
- How can assets be transferred into and out of the entity in a tax efficient manner?
- Which type of entity can protect the individual owners from liabilities of the business entity?
- Which business form permits the most flexible structure for the possible future transfer of ownership interests in the business organization?
- Which types of business purposes and/or professions might favor, or require, a particular type of entity?
- What local law reporting complexities might be applicable (e.g., state business law or foreign country law)?
- Which entity structure enables the most preferable equity ownership and capital financing arrangements?