parties, converting the business entity into another type of business entity, tax free reorganization of a business, and merging a business with another.
Forming and properly organizing a new business entity involves more than filling out a form on the Florida Department of State website.
In planning for a new business, selecting the right legal entity is extremely important to help limit the personal exposure to liability that can arise in operating a business or renting real estate. Certain entities can also help reduce taxes and personal liability.
Selection of the best entity for a new business is the result of a thorough review of both tax and non-tax considerations and should involve both a lawyer and a certified public accountant prior to its formation.
From a tax perspective, there are two classifications of corporations: a "C" corporation; and an "S" corporation. For tax purposes, a C corporation is treated as a "person" - a separate taxpayer from its shareholders. It pays taxes on its net income. Its shareholders then pay taxes on the corporate dividends they receive. An S corporation is not taxed as a separate entity, but as a "pass-through" entity. The earnings and profits of the corporation pass directly through to the shareholders who report them on their personal income tax return, thereby avoiding double income taxation. Taxes are levied only once, on the shareholders, rather than twice, on the corporation and again on the shareholders.
For either type of corporation, a federal tax identification number is required. If an eligible corporation does not want to be taxed as a separate entity, it must make an "S" election by timely filing a proper request with the IRS. Corporate bylaws must be prepared setting forth the rules concerning operation of the corporation. A formal organizational meeting of the shareholders and directors (if applicable) should be held to issue stock, elect directors and officers, and to take care of preliminary business matters such as obtaining necessary business licenses, insurance, and opening a bank account.
Limited Liability Company
A limited liability company (often referred to as an "LLC") is a legal entity that provides limited liability features of a corporation and creates a potentially favorable tax treatment. The owners of the LLC are referred to as "members." An LLC can have one or more members which can include individuals, corporations, and other LLCs.
If there will be more than one member of an LLC, a federal tax identification number is required and the members will need to decide whether the LLC is to be taxed as a partnership or as a corporation. If the LLC is treated as a partnership for tax purposes, profits and losses from the LLC's business are passed through to the members who report them on their personal federal income tax return.
An "operating agreement" should be prepared setting forth the rules concerning operation of the LLC to avoid the statutory default rules and to include provisions not adequately covered by statute, including transfer of membership units during life and upon the death of a member. An organizational meeting of the members (and any manager, if applicable) should be held to issue membership units and to take care of preliminary business matters such as obtaining necessary business licenses, insurance, and opening a bank account.
Purchase or Sale of a Business
The purchase or sale of a business is a far more complex transaction than buying or selling a private home. Such transactions have significant tax and non-tax issues which should be addressed prior to entering into a contract. The purchase or sale of a business should involve both a lawyer and a certified public accountant to represent each party prior to entering into a contract because of issues that require both legal and tax advice.
Please see Frequently Asked Questions in this website for additional information.
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As part of estate planning, business planning for a person who owns an interest in a business or who owns rental property may be needed. Restructuring ownership may be appropriate for liability or tax reasons or to allow the entity to continue after the death of the person. If the person is not the sole owner of the business, a “buy-sell” agreement may be recommended to allow the deceased owner's family to receive payment for the interest in the event of disability or death.
Business planning may include business transition planning such as selling or gifting ownership interests in a business to family members, selling a business to third
Copyright 2015. Terrence T. Dariotis. All rights reserved.