Business Entities
Michael J. Dayton
700 Walnut, Suite 1600
Des Moines, Iowa 50309
T l h
Telephone:
515 283 3111
515-283-3111
Facsimile: 515-283-3108
mjdayton@nyemaster.com
www.nyemaster.com
©2012 Nyemaster Goode, P.C.
Disclaimer
The following presentation does not
represent legal advice.
advice If you have
specific questions concerning specific
circumstances,
i
t
please
l
consult
lt your
attorney.
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©2012 Nyemaster Goode, P.C.
Business Entities
¾Build a team:
ƒ Organizers/key
O
i
/k business
b i
personnell
ƒAccounting
ƒ Financial/Banking
ƒ Risk Management/Insurance
ƒ Legal
ƒ Special technical expertise
(e.g., regulatory, IP counsel)
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Principal Selection Considerations
ƒ Liability protection
ƒ Ownership
O
hi structure
t t
ƒ Governance/management structure
ƒ Capital structure (including P&L allocations, distributions)
ƒ Income and other tax considerations
ƒ Future transfers of the business or attracting investors
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Principal
P i i l Business
B i
Structures
St t
ƒ Sole Proprietorship
ƒ Limited Liability Company
9 Single
Si l member
b
9 Multi-member
ƒ Corporations
9 C Corp
9 S Corp
ƒ Partnerships
9 General (including LLP)
9 Limited Partnership (including LLLP)
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Sole
l Proprietorship
i
hi
ƒ No filing required – single person carrying on business for profit
ƒ If using
g trade name,, countyy filingg required
q
((I.C.A. Ch. 547))
ƒ No entity-specific limited liability (insurance)
ƒ One owner; one decision-maker; one person for allocations/distributions
ƒ Own all business assets in personal name
ƒ Owe all business liabilities personally
ƒ All income is taxed to owner individually and reported on Schedule C of
owner’s
’ personall income
i
tax
t return
t
ƒ To transfer the business, each individual asset must be transferred and each
separate liability assumed
ƒ Should consider single member LLC as alternative (not helpful for torts)
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Limited Liability Company
ƒ Governing Documents
9 Certificate of Organization
g
9 Operating Agreement
9 Buy-Sell Agreement
ƒ Liabilities owed solely by LLC (absent piercing or personal guaranties)
ƒ Ownership
9Single Member LLC (one member, individual or entity)
9Multi-Member LLC (as many as wanted, individuals or entities)
9A t owned
9Assets
d bby LLC
ƒGovernance
9 Member or manager managed
9 Officers may be named
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Limited
Li i d Liability
Li bili Company
C
(cont’d)
(
’d)
ƒ Each member has membership interest (including transferable
interest)
ƒ Consider representing interest by “Units”
ƒ Membership interest = all rights as member in Company
ƒ Transferable Interest = economic rights
g
9 Can be subjected to a Charging Order by a judgment creditor.
9 Charging Order creates “lien” on Transferable Interest then can
be foreclosed
foreclosed.
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Limited Liability Company (cont’d)
ƒ For income tax purposes, single-member LLC is a “disregarded
entity ” As a result,
entity.
result all income is taxed to the member and reported on
the member’s income tax return
ƒ Multi-member LLC is usually taxed as a partnership so that income
flows through to the members’
members income tax return and taxed at the
members’ income tax rate
ƒ Multi-member LLC – flexible for distributions and allocations
ƒ Multi-member
M lti
b LLC needs
d EIN.
EIN Single-member
Si l
b LLC mustt have
h
EIN
if it has employees and pays wages
ƒ LLC (including single-member) also generally recognized for other
ta es (e.g.,
taxes
(e g state sales and use
se ta
taxes).
es)
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Multiple Member LLC (“LLC”)
ƒTo transfer the business, can transfer assets or interests (Units)
ƒBuy-sell:
ƒRestricted Transfers
ƒPermitted Transfers
ƒVoluntary Transfers
ƒInvoluntary Transfer Events
ƒPurchase Price and Payment
ƒConsider Mandatory Buy-Sell/Deadlock
ƒ Drag/Tag/Put/Call
ƒBoilerplate
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾Corporations
ƒGoverning Documents
9 IBCA (less flexibility than RULLCA)
9 Articles of Incorporation
9 Bylaws
9 Shareholders’ Agreement
ƒ Limited Liability
ƒ Owners are shareholders – ownership
p interest represented
p
byy shares
ƒ Governance: Board, Officers, Shareholder Voting, Dissenter’s Rights
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ C Corporations
ƒ Name refers to election to be taxed at corporate level under Internal
Revenue Code subchapter C
ƒ Classic corporate entity. Common example is a publicly traded
corporation
ƒ Many shareholders
ƒ Double taxation creates tax inefficiency
9Income is taxed first at the corporate level (1st level tax)
9Dividends paid to shareholders from corporate income are taxed
at the shareholders’ tax rates (2nd level tax)
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ S Corporations
ƒ Limitations on shareholders
9 Cannot have more than 100 shareholders
9 Only individuals, estates, certain trusts and certain tax-exempt
organizations can be shareholders. No “nonresident alien” shareholders
ƒ Limitations on stock
9 Only one class of stock, but can have voting and nonvoting shares
ƒ File election to be subject to Subchapter S of Internal Revenue Code
ƒ All sshareholders
a e o de s must
ust jo
join in eelection
ect o
ƒ Income must be distributed on a pro-rata basis based on ownership.
ƒ Income flows through to the shareholders and is taxed at the shareholders’ tax
rates
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Shareholders’ Agreement
ƒ Buy-Sell Provisions
ƒ Voting Agreements
ƒ Matters Requiring Stockholder Approval/Supermajority
ƒ Confidentiality
ƒ Non-Compete
N C
t
ƒ Guaranties/Contribution
ƒ Preemptive Rights
ƒ Registration Rights
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ General Partnerships
ƒ Generally similar to LLC, except…
ƒ No required filing (or intent) – occurs by 2 or more persons associating to
carry on a business for profit; For LLP – file statement of qualification
ƒ Liabilities are owed by the partnership and general partners jointly
and severally (but no liability for LLP)
ƒ Partnership Agreement – similar to Operating Agreement, can modify many
statutory defaults, except ability to dissociate
ƒ By default, all partners have authority to bind partnership
ƒ Partnership automatically dissolves upon certain events
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Limited Partnerships
ƒ Generally similar to LLC, except…
ƒ Certificate
C tifi t off Limited
Li it d Partnership
P t
hi (or
( LLLP) required
i d
ƒ At least one general partner – sole governance control, only authority to bind
ƒ General partners have joint and several liability with LP (unless LLLP)
ƒ In
I IIowa, li
limited
i d partners can participate
i i
in
i management off the
h LP to certain
i
extent and retain liability protection
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Contrast S Corporation versus LLC
ƒ Eligible Owners
9 S Corp owners must be “eligible
eligible shareholders”
shareholders
9 No restriction on entity types that can be LLC members
ƒ Income/Loss/Distribution Allocations
9 S Corp pro rata based on ownership percentage
9 LLCs can use special allocations as long as allocation has
substantial economic effect. “Substantial economic effect”:
Application of complicated rules that require, generally,
allocations to be consistent with underlying economic agreement
of members and be substantial, i.e., affect substantially amounts
recei ed by
received
b members independent of tax
ta consequences.
conseq ences
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Contrast S Corporation versus LLC (cont’d)
ƒ Cash Distributions
9 Not taxable to extent of basis for both S Corp and LLC
ƒ Property
9 S Corp: Gain recognized by S Corp on distribution of
appreciated property; gain passed through to shareholders for
b i adjustment
basis
dj t
t
9 LLC: No gain or loss recognized by partnership on distribution
of property and so none passed through to members. Property
has carryover basis in hands of members
ƒ Self Employment Tax
9 S Corp: Salary of employee shareholder subject to SE tax.
Distributions on stock are not subject to SE tax.
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
¾ Contrast S Corporation versus LLC (cont’d)
ƒ Self Employment Tax (cont’d)
9 LLC:
• General partner subject to self-employment tax
• Limited partner is not. Generally classified as a limited
partner
t
unless:
l
◦ Personal liability for the partnership
◦ Authority to contract on behalf of the partnership
◦ Participate in the partnership trade or business for more
than 500 hours per year
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©2012 Nyemaster Goode, P.C.
Business Entities (cont’d)
Questions?
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©2012 Nyemaster Goode, P.C.