Legal Entity? Same entity as owner Separate entity from owner Taxed separate from Owner Separate entity from owner, unless piercing or reverse piercing applies Separate entity from owner, unless piercing or reverse piercing applies Separate entity from owner, unless piercing or No No Yes No Formation Not applicable Partnership agreement is helpful but may arise orally under state law without the filing of state filing. TIC v. RUPA Management Owner May be divided among partners and joint and several liability Continuity of Life Terminates with death of owner Cessation of business; ceasing to operate as a ; sale or exchange of 50% or more of the profits and capital within a 12-month period; may terminate with death of partner if agreement specifies. Entity theory of Partnership adopted by RUPA Number of Owners One Can be one after death of another, temporarily; see RUPA Articles of in required Board of Directors, but can be eliminated in statutory close Continuous Articles of in required and IRS Form 2553 Board of Directors, but can be eliminated in statutory close Continuous, unless actions of shareholders cause S-election to be revoked Articles of organization required Per articles of organization Per articles of organization Unlimited 100 Eligible Owners Individuals Unlimited Unlimited Many limitations 1
Owner Liability Unlimited exposure Unlimited if general partner; limited to investment if limited partner or partner under limited Liability Transferability of Ownership Ability to Raise Capital Only by sale of entire business or creation of a different entity Limited to owners assets and borrowing ability Can sell all or a portion of interest Limited to owners assets and borrowing capital Tax Year Same as owner Majority interest rules; principal partner rules; or the least aggregate deferral of income rule; exceptions may be the business purpose of 444 election Limited to investment, unless professional services statute removes liability limit; check state law Can sell all or a portion of stock; check share transfer limitations in articles, bylaws, certificates, share transfer agreement Limited to owners contributions and borrowing capital; C is the vehicle for most publically traded entities Limited to investment, unless professional services statute removes liability limit; check state law Can sell all or a portion of stock; check share transfer limitations in articles, bylaws, certificates, share transfer agreement Limited to owners contributions and borrowing capital Calendar or fiscal year Calendar year; 444 election; or business purpose demonstrated Limited to investment, unless professional services statute removes liability limit; check state law Per articles of organization or operating agreement; commonly has some limitations; distinguish owner of membership interest and assignee of membership interest Limited to owners contributions and LLC s borrowing capital 2
Allocation of Income 100% to owner Based on agreement if it has substantial economic effect Tax on Formation if in Control Tax on Formation if Not in Control Original Basis of Stock if Not in Control Basis Increases from Operations No gain or loss Not applicable since always in control Not applicable since always in control Additional purchases or cash invested Gain to the extent debt relief exceed basis of property transferred Gain to the extent debt relief exceeds basis of property transferred Basis of property transferred less debt relief Increased by profits, additional contributions, and increase in partner s share of debts 100% to Normally pro-rata based; note that shareholder salaries and benefits may skew allocation See IRC 351 and Regulations. No gain if debt relief does not exceed basis of property transferred and no other assets by transferee Gain or loss as if sold property transferred for the FMV of the stock See IRC 351 and Regulations. No gain if debt relief does not exceed basis of property transferred and no other assets by transferee Gain or loss as if sold property transferred for the FMV of the stock ; if default, often based on agreement if it has substantial economic effect ; if, services contribution is taxable for capital interest, hot assets FMV of stock FMV of stock Increased by additional investments Increased by profits and additional contributions ; see rules if default exists 3
Basis Decreases from Operations Deductibility of Losses Nonliquidating Distributions Liquidating Distributions - Owner Level Worthlessness of Investment Charitable Contributions Alternative Minimum Tax Normal basis adjustments; depreciation, amortization, etc. Normal limitations, at- risk, passive Decreased by losses, deductions, distributions, and decreases in partner s share of debts Passed through to partners, normal limitations apply, basis, at risk, passive 100% belongs to owner Based on agreement Not a separate entity; therefore all reported as part of owner s return Already has written off or capitalized all investments; loss sale of assets if sold Gain if cash, debt forgiveness, and marketable securities exceed basis or if partner receives a disproportionate share of unrealized receivables remainder of basis Generally 50% limitation Generally 50% limitation at partner Applies at individual Applies at partner Decreased by nontaxable return of capital, if any Stay at corporate, not passed through to shareholders Pro-rata among shares remainder of basis; may qualify for Decreased by losses, deductions, and distributions Passed through to shareholders, normal limitations apply, basis, at risk, passive Rights must be prorata among shares cash and property remainder of basis; may qualify for Generally 10% limitation Generally 50% limitation at shareholder Applies at corporate Applies at shareholder Pro-rata among shares if a ; 100% if a sole proprietorship; or based on agreement if a 4
Sole Proprietor Partnership, LLP and LLLP Death - Basis Adjustments Basis of assets is Basis of interest is generally FMV on the date of death; 754 election available at Self-employment Tax Yes Yes if general partner, generally no if limited partner of wages of wages; subject to reasonable compensation rules and this is a high audit area Salaries Paid to Family Members age of 18; spouse and parents exempt from FUTA age of 18 only if all partners are parents of children Liquidating Distributions - Owner Level Not a separate entity; therefore all reported as part of owner s return Gain if cash, debt forgiveness, and marketable securities exceed basis or if partner receives a disproportionate share of unrealized receivables Worthlessness of Investment Charitable Contributions Already has written off or capitalized all investments; loss sale of assets if sold remainder of basis Generally 50% limitation Generally 50% limitation at partner remainder of basis; may qualify for remainder of basis; may qualify for Generally 10% limitation Generally 50% limitation at shareholder 5
Alternative Minimum Tax Sole Proprietor Applies at individual Partnership, LLP and LLLP Applies at partner Applies at corporate Applies at shareholder Death - Basis Adjustments Basis of assets is Basis of interest is generally FMV on the ; 754 election available at Selfemployment Tax Yes Yes if general partner, generally no if limited partner of wages of wages; subject to reasonable compensation rules and this is a high audit area Salaries Paid to Family Members age of 18; spouse and parents exempt from FUTA age of 18 only if all partners are parents of children Liquidating Distributions - Owner Level Worthlessness of Investment Not a separate entity; therefore all reported as part of owner s return Already has written off or capitalized all investments; loss sale of assets if sold Gain if cash, debt forgiveness, and marketable securities exceed basis or if partner receives a disproportionate share of unrealized receivables remainder of basis Sold stock for value of remainder of basis; may qualify for 1244 ordinary loss remainder of basis; may qualify for 6
Charitable Contributions Alternative Minimum Tax Generally 50% limitation Generally 50% limitation at partner Applies at individual Applies at partner Generally 10% limitation Generally 50% limitation at shareholder Applies at corporate Applies at shareholder Death - Basis Adjustments Basis of assets is generally FMV on the Basis of interest is generally FMV on the date of death; 754 election available at generally FMV on the Selfemployment Tax Salaries Paid to Family Members Yes wages paid to children of owner who are under the age of 18; spouse and parents exempt from FUTA Yes if general partner, generally no if limited partner wages paid to children of owner who are under the age of 18 only if all partners are parents of children of wages No exemption for any of wages; subject to reasonable compensation rules and this is a high audit area No exemption for any 7