Comparison of Entities Checklist (Slides) Submitted By: Saba Ashraf, Esq. Ballard Spahr LLP Philadelphia

Transcription

1 Comparison of Entities Checklist (Slides) Submitted By: Saba Ashraf, Esq. Ballard Spahr LLP Philadelphia

2

3 Comparison of Entities Checklist Philadelphia Bar Association September 14, 2017 Saba Ashraf Partner, Tax Ballard Spahr LLP Philadelphia, PA (215) Limited Liability Generally yes for all members (with LLCs, LLPs, and LLLPs) Yes for all shareholders. Yes for all shareholders Levels of Federal Income Tax One Generally one, unless it was formerly a C corporation. Two Number of Owners At least two. May be taxable as a corporation if publicly traded, or treated as a tax nothing if only one member One to 100 No restrictions 2

4 Tax Rates No U.S. federal income tax imposed Generally, no U.S. federal income tax imposed. However, in circumstances where it is imposed, it is currently 35% Currently 35%. Historically, C corporations had rate advantage as compared with individuals. Now equal Capital Gains Tax Rate Capital gains flow through to owners, so if owner is individual, lower CG rate applies Capital gains flow through to owners, so if owners is individual, lower CG rate applies No tax break for capital gains of a C corporation 3 Tax-Related Transfer Restrictions Generally no. May be taxable as a corporation if publicly traded. Technical "termination" on certain transfers Yes. Transfer to an ineligible shareholder terminates S status. Cannot exceed 100 shareholders No Tax Restrictions on Converting to Other Form Generally can convert tax free Generally can convert tax free only to C corporation Generally can convert tax free only to S corporation (if eligible) 4

5 Participation in Tax-Free Corporate Mergers/ Acquisitions No Yes Yes Employment Tax on Owner/ Employee Self-employment tax on share of business income to general partners, and to limited partners on guaranteed pay for services. Unclear treatment of LLC members Owner-employees are subject to FICA/FUTA on compensation, but not on other distributions Owner-employees are subject to FICA/FUTA on compensation, but not on other distributions 5 Issue Equity Interest to Service Provider Without Current Tax to Recipient Generally, can issue a profits interest without current tax. Proposed legislation may change that No. May be able to defer tax on receipt of it No. May be able to defer tax on receipt of it. May be able to argue a low value, especially if different class Allow new member/ shareholder coming in to contribute appreciated property tax-free Generally, yes Generally, only if new person, along with other shareholders that are contributing property at such time will own 80%+ of corporation Generally, only if new person, along with other shareholders that are contributing property at such time will own 80%+ of corporation 6

6 Allow a purchaser of an equity interest to receive a stepped-up tax basis with respect to the assets of the entity. Yes, by making a Section 754 election Yes, but only if a purchaser purchases 80%+ of stock of S corporation and makes a Section 338(h)(10) election Yes, but only if a purchaser purchases 80%+ of stock of corporation and makes a Section 338(h)(10) election, which may only be made if corporation being purchased is a subsidiary of another corporation 7 Special Considerations for Non-U.S. Investors -Non-U.S. partner or member s share of taxable income will be withheld on. -Non-U.S. person that is not otherwise subject to U.S. tax may become subject to U.S. tax, as it may be deemed to be engaged in U.S. trade or business. -May be subject to branch profits tax if corporate investor. Cannot have any non-u.s. investors, as it would terminate S status Non-U.S holders not subject to tax additional tax unless and until the U.S. corporation makes a distribution to them. -Liquidating distributions, and gains on sales of stock of corporation generally not subject to withholding tax 8