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Business Formation |
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Tax Aspects in Selecting a Business Entity
By John F. Rodgers The corporate form of entity remain the choice of a large number of investors will be involved and the business will be operated in multiple states. Virginia?s Stock Corporation Act is among the most advanced in the U.S. and compares favorably with the traditionally popular Delaware Act.
Partnerships still have a definite place in the arsenal of entities, but for limited liability purposes, many partnerships or joint ventures now are made up of corporations or LLCs.
In our ever more litigious world, bold indeed is the individual still willing to conduct a business as a sole proprietorship, yet some circumstances may make this simplest of all business forms the client?s desire.
Procurement regulations, particularly of the federal government, have given rise to increasing use of Teaming Agreements ? loose agreements wherein may lie disastrous loopholes for the unwary.
Sole Proprietorships
A sole proprietorship is a business owned and operated by an individual without any formalities whatsoever. It is characterized by the following attributes, unlimited liability of the principal for business debts, high ownership involvement, limited life span and usually small in size. There are very few sole proprietorships left except in the area of domestic servants. The tax attributes of a sole proprietorship are that all profits and losses are reported directly on the tax return of the owner, through Schedule C. This type of business entity is advantageous because many items which would be limited or undeductible by an indvidual can be deducted by a sole proprietor which include: home office expenses, automobile usage, entertainment, club dues and the like. |
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Partnerships
There are three classes of partnerships, the general partnership, the limited partnership and the limited liability company. Each of these types have differing attributes. |
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General Partnership
A general partnership is a business organized by two or more persons (or businesses) engaging in a venture for profit. It is characterized by unlimited liability of the principals for business debts, high ownership involvement, has limitations on transfer of interests, limited life span, and varying in size. Professions generally have used this model for their organizations. The tax aspects are that all profits and losses flow through the entity directly to the owners. The partnership files a Form 1065 and reports flow-through items on Schedule K-1.
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Limited Partnership
A limited partnership is also a business entity. It allows for unlimited liability for its active participants (general partners) and limited liability for its investors (limited partners). There is less ownership involvement, limitations on transfer of interests, a limited life span, and these usually are limited to specific projects or ventures. The profits and losses can be allocated among the general and limited partners in a flexible manner and flow directly through the entity to the partners. It also files a Form 1065. |
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