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A major concern when forming a business involves the choice of entity through which to operate the business. A number of factors, however, must be considered prior to and after making such a decision. Our attorneys have extensive experience in evaluating such factors and making recommendations that will best the meet the client’s needs. Whether it’s a new business formation, a single business transaction, complex transactions, or a combination of these, our approach is consistent. Our business planning services include registering the business entity with the state; drafting the formation/transaction documents; preparing ownership instruments; preparing the necessary resolutions, bylaws, and governing documents; establishing tax compliance with Federal and State taxing authorities; and structuring the transaction to address tax considerations respective to the matter. We have set out the basic framework within which such considerations are structured as follows:
The three major types of entities are sole proprietorships, partnerships, and corporations. Each entity has certain tax and non tax advantages and disadvantages. A sole proprietorship is a form of business in which one person owns all the assets and is fully responsible for all the liabilities. A partnership is a form of business in which two or more persons or entities engage in a business for profit and own all the assets and are responsible for the liabilities. It is based on a voluntary contract between these parties. A number of other entities fall within the scope of partnership law, including Limited Liability Companies (LLC), Limited Partnerships (LP), and Limited Liability Partnerships (LLP).
A corporation is a legal entity created by the authority of state law. It is separate and distinct from its owners and may be owned by one or more persons or entities. There are advantages of each type of entity. Corporations have limited liability, owners can have employee status, corporations usually can raise funds more easily than can partnerships and sole proprietorships, and corporations can have a tax year different from their owners. However, regular corporations produce double taxation and do not pass through tax attributes (e.g., losses, credits, etc.) to their owners. Certain corporations may elect to operate as Subchapter S Corporations, which contain many of the "flow through" characteristics of a partnership.
The shareholders of a corporation may wish to liquidate the corporation for a variety of reasons which include: the avoidance of double taxation of business earnings, the avoidance of the personal holding company tax and the accumulated earnings tax, recognition of losses at the shareholder level, and the resolution of a potential buyer's unwillingness to purchase the corporation's stock. In order for the liquidation rules to apply, the corporation must be in a status of liquidation. A "status of liquidation'' exists if the corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its shareholders. A corporate liquidation is generally treated as a taxable exchange. Both the liquidating corporation and its shareholders recognize gain or loss, and the shareholders will have a fair market value basis for any property received.