Explore BrainMass

Difference in Business Entities

BC corp would like your feedback on the taxation implications for the various business entities. They are particularly concerned about how they will be taxed under each entity as they suspect profits will be large.

Part 1
Develop a 5-6 slide presentation on the following business entity options:

C Corporation
S Corporation
Limited Liability Company

Be sure to explain how BC Corp. would be taxed under each business entity. Finally, make a recommendation for the type of entity that they should establish, knowing what their profit expectations are for the business. Support your recommendation with rationale.

Part 2:
BC Corp. has decided to move forward in establishing their business entity based on your recommendation. Since their headquarters is located in Illinois, they will be completing the appropriate articles of incorporation for the state of Illinois. They have enlisted your help with completing the necessary paperwork. Identify the necessary information needed to incorporate. Comment on whether this is practicing law without a license and explain why or why not.

Solution Preview

General Partnership-If two people arrange to carry on a business while sharing control and profits, they automatically create a partnership.

Liability - They are liable on unlimited basis for all debts and tort liabilities related to the business, except for the amount state law allows him to keep. This includes all personal, real property to settle the debts of the partnership. See Uniform Partnership Act.

Limited Liability Company - An LLC is a hybrid entity between a corporation and partnership. Like a partnership, the members of the LLC provide capital and manage the business according to their agreement. Both members and partners of LLC can participate in all business decisions w/out incurring personal liability.
Advantages over Corporation - Everyone may run the business. An LLC is very flexible, itsa pure matter of contract, thus, it is unlimited in what the parties can provide in the operating agreement. Essentially, they start w/blank slate and write an agreement as what the parties want to do.

Creation of Entity - Requirements:
Must file articles of organization
Economic interests are freely transferable
Management interests transferable only w/consent of all other members.
Members have limited liability, even if they participate in management
Role of mgmt usually proportionate to original contribution

Corporations - There are two forms S and C corporations. It is a legal entity. Shareholders provide capital, and directors and officers manage the business. Corporate participants are not personally liable for corporate debts, only the corporation is liable.

S Corporation - Requirements:
Must be domestic, US Corporation
Can have no more than 75 SH, all of whom must consent to S election
Shareholders must be individuals
Class of Stock-Can have only one class of stock (common)
If there is more than one class, must be a C Corporation
If we look at LLC, we get the benefit of pass-through income taxation (the disregarding of the entity) for losses with an LLC. The LLC doesn't have limitation of only once class of stock.

C Corporation
Creation of Entity
Formation-Requires filing with the state and certification of incorporation.
Clear name with government
Prepare articles of incorporation, include mandatory information. Under DE law the following information is required:
Name-Must include the word corp, inc.
Number of shares
Address of corps. initial office
Name and address of each incorporator
Names of directors, if they have been named prior to filing the articles
Nature of business
Sign; file w/secretary of state. The state chosen matters w/respect to the state law applying to internal affairs
Select a director, have a board meeting, adopt by-laws and appoint officers


Traditionally, businesses are categorized any of the three forms of organization: sole proprietorship, partnership, and corporation. Since the economic environment evolves through the passage of time, the organizational forms that play vital roles in the business playfield was not exempted from this change. In a taxation point of view for instance, corporations are divided into C type and S type. National taxation laws offer different advantages and disadvantages for these entities. As such, many other business organizational forms developed such as limited liability partnerships (LLP), professional limited liability partnerships (PLLP), and the subject of this paper, limited liability company (LLC).

An LLC is defined as an unincorporated company formed under applicable state statute whose members cannot be held liable for the acts, debts, or obligations of the company and that may elect to be taxed as a partnership. According to Humphreys, LLC's are destined to be the common choice of entity for private business and investment enterprises. It possesses the foremost features of both partnership and corporation, and thus, considered as a hybrid version of both. The choice is swayed by LLC's numerous advantages if seen in different viewpoints.

In terms of owners' liability, it enjoys protection like that of a corporation. Creditor claims would be limited to what the LLC possesses and does not extend to the personal assets of owners (which are called "members"). Exception to this advantage is when a member signed a personal guarantee or engaged in wrongful conduct meant to defraud the LLC or its clients or customers, in which case the court may "pierce the corporate veil." In the viewpoint of organization, the tenets imposed on LLC's are less complex than that of most states impose on forming corporations. Examples of these are the waiving of requirements for annual meetings of members and bylaws. However, to provide and maintain proper governance, members are more likely to adopt an Operating Agreement or Limited Liability Company Agreement.

Pass Through Taxation

As far as the Internal Revenue Code is concerned, an LLC is taxable as a partnership. As such, it also inherits the partnership's pass-through tax mechanism and advantage. For the purpose of arriving at the net income or loss, an LLC is considered as a separate entity, distinct from its members. By using a definite accounting method, the LLC computes its operational result for a given year, and elects tax treatments of amount and timing of income recognition and deduction at the entity level. Eventually, the income, losses, gains, deductions, and credits pass from the LLC to its members, without being taxed at the LLC level, unlike the corporate set up that shoulders an income tax rate of 15%, 25%, or 34% on corporate net income and another round of taxes when distributed to shareholders as a dividend. Whether actually or constructively received, the share in income and loss of operations in an LLC are reported in each member's individual income tax returns. Therefore, in terms of reporting and paying income tax, an LLC is viewed as a cluster of individuals rather than as a separate entity.

The character of an income or loss item for an LLC will be the same for its members. This feature made accounting of distributive share easy for the members as set by the LLC's Operating Agreement or Limited Liability Company Agreement. In case where the Operating Agreement does not provide the distribution ratio or any other method of allocation or that the allocation provided has no substantial economic effect, distributive share will be dictated by the members' interest in the LLC. Moreover, income, gain, loss, and deductions in relation to the contributed property should also be allocated to the members for the purpose of determining the difference between the tax basis of such property and its corresponding fair market value. This would have a bearing once the LLC experienced a net loss. The member would be allowed to deduct his share of the loss from his personal tax return up to the amount of the tax basis of his LLC interest. If the share in loss exceeds the LLC interest, the excess is allowed to be carried over and deducted when the member's LLC interest becomes positive during any ...

Solution Summary

Over 4500 words advise on what kind of business to start up, taking into account profit expectations, etc. The choice is taken from C Corporation, S Corporation, Partnership or Limited Liability Company.