Look at basis for tax purposes, not FMV
FMV is important for substantial economic effect
a. Corp used to be 4 factor analysis. Now check-the-box to opt in unless default in.
i. Asked: Corporate resemblance test no longer relevant
II. Classifying Partnerships for Tax Purposes
a. Two or more members: pship or corporation 7701-2(a)
i. Default = partnership 7701-3(b)(1)(i)
1. Applies to LLCs
2. To opt out of default Check-the-box
3. Look to state law; If state law corp = corp for tax 7701-2(b)
b. One Member: Corp or DRE 7701-2(a) ...view middle of the document...
Registration. Foreign state registration.Check | -- | -- | Formation formalities |
Flexibility. Management power and authority with managers. No statutory req for officers and directors. Can have structure built into LLC, but not required (look at operating agreement)Check | Each partner has equal management right. Each can bind the other. | Only general partner can contractually bind partner. Limited partners, if get involved in management, can be treated as general partner.A lot of complicated issues. | Bound by formal statutory reqs under state law. SHs elect board. Mngmt by BoD. BoD elect officers. Officers carry out board policies. | | Management Structure |
All members have LL.Check | Each has personal liability for debts of partnership. | LPs liability limited to agreed investment. GP has personal liability. | SH liability is limited to agreed investment.Check | Check | Liability |
FlexibleCan draft anything you want | Flexible | Flexible | Unlimited SHs and classes of stock. | S corp can only have 100 US residents, some tax exempt entities, and trusts and estates. Limitations. Profits and losses must be allocated according to SH percentages. (PRO RATA) Only one class of stock. | Capital Structure |
Capital interestProfit Interest FLEXIBLE | Capital InterestProfit InterestNot treated as employee for tax purposes FLEXIBLE | Capital InterestProfit InterestNot treated as employee for tax purposes FLEXIBLE | Stock optionsStatutoryIncentiveSH and employees not subject to employee tax | Same as S | Equity Compensation |
| Foreign entities won't invest (issues of exempt status, withholding problems)(Problems from passthrough entities) | Foreign entities won't invest in those taxed as a partnership (issues of exempt status, withholding problems)(Problems from passthrough entities) | Most flexible(Double tax- disincentive for investment through the corporate structure)Choice for initial public offering | Limited to 100 resident alien investors | Investment |
May convert to C-Corp prior to IPO | May convert to C-Corp prior to IPO | May convert to C-Corp prior to IPO | THIS ONE | | IPO |
Through SMLLC (tax free reoganization) | | | THIS ONE | THIS ONE | Tax Free Reorganization |
SMLLC can elect corp status - otherwise treated as passthrough (more than one - partnership) LLC or partnership can convert to corp on tax free basis THIS ONE | LLC or partnership can convert to corp on tax free basis THIS ONE | LLC or partnership can convert to corp on tax free basis THIS ONE | Cant convert to LLC or partnership without two levels of taxation (tow charge - deemed liquidation) C corp can elect S-Corp status. May have to deal with bulit in gains tax. Recapture issues that need to be looked at. May be a tow charge. Need to look at state law - conversion might be taxable by state and not federal!!! | Cant convert to LLC or partnership without 1 level of taxation | Non-taxable Conversion through merger |
Capital gains pass through to...