LLC, C/S Corps, FLPs

Introduction

The type of business entity used to operate your business will dictate the legal requirements regarding its formation, periodic state filings, tax consequences at the entity level and personal level (i.e. whether there will be double or single taxation). The type of entity chosen will also dictate how decisions will be made among business owners; how profits and expenses will be allocated; as well as whether shares of the business can be held in trust. It is critical to choose which type of business is most appropriate to your business and examine the requirements of your business structure when undertaking succession planning. These decisions should always take place in consultation with a qualified attorney and accountant.

Entity Characteristics LLC (Limited Liability Company) “C” Corporation “S” Corporation
Ownership Rules / Formation Unlimited number of
Members allowed
Unlimited number of shareholders; no limit on stock classes Up to 100 shareholders; only one class of stock allowed
Owners’ Personal
Liability
Generally no personal liability of the Members Generally no personal liability of the Share-holders Generally no personal liability of the share- holders
Tax Treatment The entity is not taxed (unless chosen to be taxed); profits and losses are passed through to the Members Corporation taxed on its earnings at a corporate level and Shareholders are taxed on any distributed dividends With the filing of IRS Form 2553, a “C” becomes an “S”; profits and losses are passed through to the Shareholders
Key Formation
Documents
Articles of Organization / Certificate of Formation;
Operating Agreement
Buy-Sell Agreement
Articles of Incorporation (file with NY SOS) ; Bylaws; Organizational Board Resolutions; Stock Certificates; Stock Ledger; Shareholder Agreement Articles of Incorporation; Bylaws; Organizational Board Resolutions; Stock Certificates; Stock Ledger; IRS & State “S” Corporation election; Shareholder Agreement
Management of Business The Operating Agreement sets forth how the business is to be managed; a Member (owner) or Manager can be designated to manage the business Board of Directors have overall management responsibility; Officers have day-to-day responsibility: Shareholders elect Board; Board elects Officers Board of Directors has overall management responsibility; Officers have day-to-day responsibility
Capital Contributions Members typically contribute money or services to the LLC and receive an interest in profits and losses Shareholders typically purchase stock in the corporation, either common or preferred Shareholders typically purchase stock in the corporation, but only one class of stock is allowed
Restriction on Ownership -NONE- -NONE-
Double Taxation
Some restrictions; for ex. certain Trusts

 

The Family Limited Partnership or FLP

Businesses owned within a Family Limited Partnership or Family Limited LLC can significantly lower or eliminate state and federal estate taxes due within 9 months of the death of an owner if properly drafted and the business meets certain operational criteria. These entities allow the value of shares of a business to be devalued due to the division of share ownership among those controlling the business and those owning title to interests in the business.   Ownership interests can be categorized and transferred to limited partners (or members in the case of an LLC) and controlling partners (or members.) This division in different kinds of interests can allow for significant discounts to be taken against the total value of a business for purposes ascertaining estate taxes.

 

General Partnership vs. Limited Partnership

 Entity General Partnership Limited Partnership
Formation Ownership Rules d/b/a filed with County Clerk
No limit on number of partners
Certificate of L.P. with New York SOS; No limit on number of partners
Owners’ Personal
Liability
Each partner has unlimited joint and several liability Each general partner has unlimited joint and several liability. Limited partners generally shielded from personal liability.
Tax Treatment No entity level tax: all profits and losses flow through to partners; income subject to self-employment tax. No entity level tax: all profits and losses flow through to partners; income subject to self-employment tax.
Governing Documents None required; written partnership agreement recommended. Written partnership agreement required.
Management of Business Full authority and control in each partner, unless restricted by partnership agreement. Full authority and control in each partner, unless restricted by partnership agreement; limited partners may have specific voting rights.
Capital Contributions New equity from new or existing partners. New equity from new or existing partners.
Restriction on Ownership Equal to all partners, unless partnership agreement provides otherwise. Among the partners as required by the