Entity Selection

Question 1

What are key considerations in entity selection?

Answer 1

(1) Liability to clients, customers, employees, and government; (2) Taxes at federal, state, and local level; (3) Governance; (4) Ownership; (5) Ongoing Administrative Requirements; and (6) Initial formation costs and efficiency

Question 2

What are the five types of entities?

Answer 2

(1) Sole Proprietorship; (2) Partnership; (3) C-Corporation; (4) S-Corporation; and (5) Limited Liability Company

Question 3

Sole Proprietorship

Answer 3

(1) Liability - Weak protections
(2) Taxes - single owner includes income on personal tax

Pay estimated taxes if prior year’s NYS/ NYC tax owed >$300 and this year’s won’t cover 90% of anticipated owed

Returns: Info; must report business income in NYS

(3) Governance - Single owner (not appropriate for bringing on additional parties)
(4) Ownership - Single owner; capital raising is limited
(5) Administrative requirements - Minimal
(6) Initial formation - Cheap

Question 4

Partnerships

Answer 4

(1) Liability - Weak protections
(2) Taxes - Pass through taxation

Owners taxed directly (must have cash for income taxed even if they didn’t get it)

Pay estimated taxes if prior year’s NYS/ NYC tax owed >$300 and this year’s won’t cover 90% of anticipated owed

Returns: Info

(3) Governance - Flexible; set forth in partnership agreement
(4) Ownership - Less flexible than LLC/ corporation; permit investment without control
(5) Administrative requirements - Minimal
(6) Initial formation - Cheap, but limited partnerships have publication requirement

Question 5

C-Corporations

Answer 5

(1) Liability - Strong protections
(2) Taxes - corporate level (double taxation)

Tax is on (a) earnings and (b) certain distributions

Fed: Up to 50K (15%); 50-75K (25%); 75K-10m (34%); 10m< (35%)

State: Fixed $25; more for >100K

City: $25 minimum; income-based rate is 8.85%

Estimations: If expected to pay >$500, must guess and pay quarterly

Returns: Tax

(3) Governance - Board of directors and officers; appropriate for complex organizations
(4) Ownership - Multiple classes of stocks allowed; transferable subject to securities law
(5) Administrative requirements - More onerous
(6) Initial formation - Cheap (~$250)

Question 6

S-Corporations

Answer 6

(1) Liability - See C-Corp (Strong)
(2) Taxes - pass through

No federal level taxes
Restrictions/ Elections: (a) No different classes of stock; (b) no more than 100 SHs; (c) must file timely elections (Fed/ NYS)

NYS - Income-based corporate tax replaced by fixed dollar ($5m = $5k)

NYC - General corporate tax remains

Returns: Info

(3) Governance - See C-Corp (Board of directors and officers; appropriate for complex organizations)
(4) Ownership - Limit on number and type of stockholders; transferable subject to securities law
(5) Administrative requirements - See C-Corp (more onerous)
(6) Initial formation - See C-Corp (Cheap - ~$250)

Question 7

Limited Liability Companies

Answer 7

(1) Liability - Strong
(2) Taxes - pass through

Special rules

Fed/ State: Treated as partnership for tax purposes
Single-member LLC: Disregarded and treated as sole proprietorship

Returns: Info

(3) Governance - Highly flexible; set forth in LLC operating agreement; can be member- or manager-managed.
(4) Ownership - Highly flexible; multiple classes of interests allowed; transferable subject to securities law
(5) Administrative requirements - Less onerous, but recordkeeping reqs important
(6) Initial formation - Expensive (~$1,000)

Question 8

What are important tax considerations?

Answer 8

(1) Employer Identification Number (EIN): Must have a bank account if you give wages to ANY employee
(2) Employee tax withholding (Fed/ NYS)
(3) Payroll taxes - employees (SS, Medicare, Unemployment); family; independent contractors (don’t have to withhold but must report payments >$600)