Category: Choice of entity – general

DELAWARE LIMITED PARTNERSHIP DECISIONS

By , January 23, 2017 1:27 pm

On rare occasions, LLC lawyers should form limited partnerships rather than multi-member LLCs for their clients.  This means that these lawyers should keep abreast of important limited partnership cases.  Two such cases, both decided by the Delaware Supreme Court, are addressed in the new post by Peter Mahler under the link below.  Both cases demonstrate that limited partnership agreements can validly give extremely broad discretion to general partners.

Here’s the link:

http://www.nybusinessdivorce.com/2017/01/articles/delaware/limited-partners-take-licking-two-delaware-supreme-court-decisions/

NEW BLOG POST ABOUT WHETHER REAL PROPERTY OWNERS ARE HOLDING THEIR PROPERTY AS TENANTS IN COMMON OR AS PARTNERS IN A PARTNERSHIP

By , June 28, 2016 9:54 am

Perhaps as many as a third of all LLCs are real estate holding companies.  Hence the importance for LLC formation lawyers of the new blog post under the link below.  The post addresses the question whether real property owners should hold their real property as tenants in common or as partners in a partnership (e.g., in an LLC taxable as a partnership).

Here’s the link:

http://www.taxlawforchb.com/2016/05/owning-real-property-tic-or-partnership-why-care/?utm_source=Tax+Law+for+the+Closely-Held+Business&utm_medium=email&utm_campaign=2796f25ecb-RSS_EMAIL_CAMPAIGN&utm_term=0_4d5d267118-2796f25ecb-73367009

PETER MAHLER BLOG POST ABOUT NEW CASES ABOUT STATE-LAW PARTNERSHIPS

By , June 10, 2016 12:12 pm

Peter Mahler’s blog post under the link below concerns three recent New York cases concerning state-law partnerships, not LLCs.  But a key lesson implicit in these cases is that business people should avoid the use of state-law partnerships—and should convert existing state-law partnerships into LLCs—not only because of liability issues but also because state-law partnership statutory rules can often yield unpleasant surprises about non-liability business organization law issues.

Here’s the link:

http://www.nybusinessdivorce.com/2016/05/articles/grounds-for-dissolution/potpourri-partnership-breakups/

THE VALUE OF FAMILY BUSINESS ENTITIES

By , April 8, 2016 9:50 am

The following link is to a recent blog concerning the value of business entities in holding and conducting family-owned businesses:

http://www.lexology.com/library/detail.aspx?g=32903a39-fd0e-41eb-9d2f-b0378d23b043

ARTICLE ON GENERAL PARTNERSHIPS VS. LLCS

By , July 17, 2015 10:57 am

I’ve just published the article under the link below in a number of New Hampshire journals, and the law governing the general partnerships and LLCs discussed in the article is New Hampshire law.  However, I think the main points under the article apply in most or all other U.S. jurisdictions.

The basic point in the article is this:  If you’re operating your business as a general partnership, convert it to an LLP or an LLC.

Here’s the link:

http://www.nhbr.com/July-10-2015/War-of-the-worlds-partnerships-vs-LLCs/

BENEFIT CORPORATIONS

By , July 9, 2015 8:57 am

Roughly, benefit corporations are state-law business corporations whose directors and officers are protected from shareholder fiduciary claims by state corporate law if they seek social benefits to the detriment of corporate profits.  Below is a link to a post about recent changes in Delaware benefit corporation law.

It’s also readily possible to structure LLCs in their operating agreements to achieve the same results as you can get from state benefit corporation law.  However, multi-member LLCs have a big advantage over state-law business corporations because they, unlike corporations, can be taxable as partnerships under IRC Subchapter K.  Subchapter K can enhance many common benefit corporation features.

In short, given the freedom of contract of LLCs and their ability to be taxable under Subchapter K, I’m not at all sure that it ever makes sense for an entity to be a benefit corporation instead of a benefit LLC.

Here’s the link about developments in Delaware benefit corporation law:

http://www.lexology.com/library/detail.aspx?g=605c1005-87b0-43bd-ad18-89e27e5af422&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2015-07-02&utm_term=

CHOICE OF ENTITY IN REAL ESTATE TRANSACTIONS

By , February 27, 2015 11:57 am

Here is a link to a useful blog post by the Fox Rothschild law firm on the above subject:  http://realestatecounsel.net/2015/02/23/real-estate-private-equity-choice-of-entity-considerations/.

S CORP STATISTICS AND LLCS

By , April 4, 2014 9:11 am

I happened to be reviewing the latest publication of the IRS’s Statistics of Income lately, and I decided to check their statistics about how many S corporations have only one shareholder, how many have two, etc.  This is significant for LLC practice for the simple reason that LLCs, like state-law business corporations, are generally small, closely held business entities.  So if IRS statistics indicate that 60% of all S corporations have only one shareholder and that 30% have only two, this tells you a lot about LLC formation practice—namely, that over time, 60 percent of the clients who will call you for LLC formations will probably be individuals wanting to form single-member LLCs, 30 percent will probably be forming two-member LLCs, etc.

This, in turn, tells you that you better have very good forms for all of the main types of single-member LLCs owned by individuals, for two-member LLCs (with great deadlock provisions, etc.), and so forth.  As I discuss in detail in my Wolters Kluwer LLC book, you need six main forms for single-member LLCs whose members are individuals, four for those with two members, etc.

For a table that summarizes the above IRS S corporation shareholder statistics, click here.  Unfortunately, the latest year for which the IRS has published these statistics is 2007, but I doubt they’ve changed much since then.

LLCs AND CHOICE OF ENTITY—THE BIG PICTURE

By , June 9, 2010 11:22 am

Every LLC lawyer will agree that the most important threshold task in forming LLCs is a task often referred to as “choice of entity.”  In the months and years to come, this blog will address dozens of choice-of entity issues.

But the key fact you have to realize before you undertake any choice-of-entity analysis is that there is, technically, no such thing. Rather, choice of entity requires three types of analyses, each of which is entirely different from the others. When you’re doing choice-of-entity, you should, to the extent of your competence, do all three analyses and then, if there are any conflicts among them, reconcile these conflicts.

To explain:

  • Non-tax choice of entity. The first type of choice-of-entity analysis is non-tax choice of entity. This is the process by which lawyers choose the best type of business organization for their clients on non-tax grounds—mainly on business organization law grounds. The key types of business organizations are sole proprietorships, divisions, general partnerships, limited partnerships, corporations and LLCs. The key issues are, for most clients, (1) Does the client need a liability shield? (2) If so, which type of organization will provide the client with the best shield? (3) Does the client need the special statutory business asset protections referred to by LLC lawyers as charging order protections? (4) If so, should the client obtain these protections through a general partnership, a limited partnership or an LLC? (Most corporate statutes don’t provide charging order protections.)
  • Choosing the right federal income tax regimen for federal income tax purposes. The second is choice of federal income tax regimen for federal income tax purposes. The relevant regimens are disregarded entity taxation and Subchapters C, K and S. Key issues include: (1) Which regimen will provide the client with the lowest tax rate? (2) Which will provide the client with the greatest flexibility in deploying and redeploying business assets?
  • Choosing the right federal income tax regimen for Social Security Tax purposes. The third is choice of federal income tax regimen for Social Security Tax purposes. The relevant regimens are those listed above, but the relevant issues are entirely different from federal income tax issues. In addition, you won’t find the key authority in this field in the Internal Revenue Code or even in a final regulation—it’s a little-known but remarkably powerful IRS proposed regulation designated Prop. Reg. § 1.1402(a)-2.

Understanding these three types of analyses in detail takes a lot of study and experience; but the best place to start in understanding them is with the Big Picture. The Big Picture is in the three bullet points above.