9Sole ProprietorshipPartnershipLLCSCorporationC1.Limited LiabilityNoGeneral Partner has no liability protection, except liability shield provided by election to be a Registered Limited Liability Partnership. Limited partners have limited liability protection unless provided otherwise.All members have limited liability protection from the LLC’s debts, unless provided otherwiseAll shareholders have limited liability protection unless otherwise ProvidedShareholders have limited liability protection unless otherwise provided2.Levels ofFederalIncome TaxOneGenerally, one. Two, if a former C corporation and too much passive income or built-in gains under Sec and 1375Two3. TexasFranchise TaxYes
10No restrictions, but at least two to be onsidered a partnership Sole ProprietorshipPartnershipLLCSCorporationC4. Number Of OwnersOneAt Least twoNo restrictions, but at least two to be onsidered a partnershipOne to 75No Restric-tions5.Types Of OwnersN/AAnyOwnership is limited to U.S. Citizens and residents and to certain U.S. trusts. No corporate (except S corporation which is 100% owner) or partnership shareholders6.Classes ofOwnershipInterestsMultiple classes are permittedOnly one class of stock is permitted. However, there can be differences in voting rights, and debt may be used.Multiple Classes are Permitted
11Sole ProprietorshipPartnershipLLCSCorporationC7.VotingRights ofEquityHoldersN/AVoting rights of equity holders are usually specifically set forth in the Partnership Agreement. To the extent the Partnership Agreement does not address voting rights of equity holders, Texas statutory law controlsVoting rights of equity holders are usually specifically set forth in the Regulations (an agreement among all of the equity holders). To the extent the Regulations do not address voting rights of equity holders, Texas statutory laws controlA. Board of DirectorsB. Mergers, conversion, sale of substantially all assets, dissolution -ShareholdersC. Amendments of Articles of Incorporation and maybe Bylaws -Shareholders(voting rights may be modified by Share-holders’ Agreement or Voting Agreement)Same asS Corp-oration
12The filing fee in Texas for a Texas Limited Partnership is $750. Sole ProprietorshipPartnershipLLCSCorporationC8. RestrictiononOwnershipofSubsidiariesNo restrict-ionsNo restrictionsCan own 100% of theStock of anotherS Corporation.9. TaxYearCalen-darGenerally calendar10.Organiza-tionalCostsN/AThe filing fee in Texas for a Texas Limited Partnership is $750.The filing fee in Texas for a Texas LLC is $200The filing fee in Texas for a Texas corporation is $300
13Sole ProprietorshipPartnershipLLCSCorporationC11. Day to dayManage-mentStructureN/AGeneralPartnerMembersorManagersBoard of Directors/ officers (unless otherwise provided in Shareholders’ Agreement)Same as S Corporation12.Taxation ofContributionsof Propertyto EntityNon-TaxableNontaxableunless disguisedsale, violateinvestmentpartnershiprules or thepartner isrelieved fromdebt in excess of basis.Nontaxable unless disguised sale, violate investment partnership rules or the member is relieved from debt in excess of basis.Taxable, unless the transferors meet the 80% control test of IRC §351, in which case the transfer is nontaxable except to the extent of debt relief in excess of basis.
1438.6 % 35 % N/A Yes No Sole Proprietorship Partnership LLC S CorporationC13. Maximum Marginal Federal Tax Rate on Income from Business38.6 %35 %14.Special TaxAllocations ofIncome andLossN/AYesNo15.Deductibilityof Losses(and basis forentity-leveldebt)Generally no restrict-ionsA partner may deduct his allocable share of partnership’s losses only to the extent of his tax basis in his partnership interest which could include his allocable share of partnership debt.A member may deduct his allocable share of LLC’s losses only to the extent of his tax basis in his LLC interest which includes his allocable share of LLC debt.A shareholder may deduct his allocable share of corporation’s losses only to the extent of his tax basis in his stock which does not include any portion of the corporation’s debt but does include shareholder debt to corporationShareholders may not deduct any of the corporation’s losses.
15Nontaxable to the extent of a member’s tax basis in his LLC interest Sole ProprietorshipPartnershipLLCSCorporationC16.Taxation ofCash Distri-butionsN/ANontaxable tothe extent of apartner’s taxbasis in hispartnershipinterest.Nontaxable to the extent of a member’s tax basis in his LLC interestGenerally non-taxable to the extent of the shareholder’s tax basis in his stockTaxable as dividends to the extent of the corporation’s earnings and profits and then nontaxable to the extent of the shareholder’s tax basis in his stock.
16Taxation of Distri-butions of Appre-ciated Property Sole ProprietorshipPartnershipLLCSCorporationC17.Taxation of Distri-butions of Appre-ciated PropertyN/AGenerally Nontaxable; but can be taxable based on unequal distribution of §751 assets(“Hot Assets”) or distributions of property contributed by one partner to another within 7 years of contribution.(“Hot Assets”) or distributions of property contributed by one member to another within 7 years of contribution.Taxable toBothandShare-holders.Same as S Corporation
17Taxation Upon Liquidation Sole ProprietorshipPartnershipLLCSCorporationC18.Taxation Upon LiquidationN/AGenerally Nontaxable; but can be taxable based on unequal distribution of §751 assets(“Hot Assets”) , distributions of property contributed by one partner to another within 7 years of contribution or distributions of cash in excess of partner’s tax basis in his partnership interest.(“Hot Assets”) , distributions of property contributed by one member to another within 7 years of contribution or distributions of cash in excess of members’s tax basis in his partnership interest.Taxable tobothandShareholdersSame asS Corporation
18Transfer Restrictions Imposed by Tax Considerations Sole ProprietorshipPartnershipLLCSCorporationC19.Transfer Restrictions Imposed by Tax ConsiderationsNOGenerally, No. Certain transfers of 50% or greater percentage can terminate entity for tax purposes.AssigneeGenerallyCannot BecomeLimited partnerWithoutMajority consentAssignee generally cannot become full member without majority consent of LLC or other members.Yes.No transfers to an ineligible share-holder. Cannot exceed 100 share-holders.20. Section 754 Election to Adjust Inside Basis of Entity Assets Upon Sale of an Owner’s interest or taxable Distribution of PropertyN/AYESYes
19Ability to use written consents Sole ProprietorshipPartnershipLLCSCorporationC21.Ability to use written consentsN/ANo, unless inAgreementYes22. Annual meetings/ resolution, necessary for perpetuation of managementNOYes (unless Share- holders’ Agreement provides for perpetual management)Same as S Corporation23.Classification for federal income tax purposesSole Proprietorship or Partnership unless affirmative election is made to be taxed as an Association (i.e. Corporation)
20DISCUSSION QUESTIONS1. When might an S corporation be preferable to an LLC or LP?2. When is a single member LLC not a good idea?3. When, if ever, is a C corporation appropriate?
21DISCUSSION QUESTIONS4. When would an LLC be preferable to an LP?5. Can you have a 0% General Partner in a Limited Partnership?6. What is the level of protection a Registered Limited Liability Partnership provides to its partners?
22REGISTERED LIMITED LIABILITY PARTNERSHIP (“RLLP”) A. Requirements.1. Name must include the words “registered limited liability partnership” or “limited liability partnership” or the abbreviation “LLP” or “L.L.P.”2. Registration with the Secretary of State; $200 per Partner annual filing fee.3. Liability Insurance of $100,000 or $100,000 of designated segregated funds
23B. Liability Shield Limitations. 1. Liability Protection Not Available if:a. Partner directly supervised or directed the negligent partner or representative;b. Partner directly involved in specific negligent activity committed by other partner or representative; orc. Partner had notice or knowledge of omissions, errors, or negligence and failed to take reasonable steps to cure or prevent such actions.
24B. Liability Shield Limitations (cont.) 2. Actions or omissions detailed in 1 above are fact questions.3. Minimal case law interpreting.
25Texas Franchise Tax Planning Conversion of Corporation to Limited PartnershipEXISTING PICTURE:Individual Shareholders100%Corporation(TX)[S Corp]
26Texas Franchise Tax Planning Conversion of Corporation to Limited PartnershipSTEP ONE: Form the Holding Company, a Texas general partnership; make election for the Holding Company to be taxed as a corporation followed by S election (Note: Under IRC Reg. § T(c), an entity that timely files S-election (Form 2553) is deemed have made election to be classified as a corporation (Form 8832)).Individual Shareholders100%Corporation(TX)[S Corp]Holding Company(TX GP)[taxed as S Corp]
27Texas Franchise Tax Planning Conversion of Corporation to Limited PartnershipSTEP TWO: Transfer 100% of stock ownership in the Corporation to the Holding Company. The Holding Company then makes a Q Sub election for the Corporation.Individual ShareholdersHolding Company(TX GP)[taxed as S Corp]CorporationTX[Q Sub]
28Texas Franchise Tax Planning Conversion of Corporation to Limited PartnershipSTEP THREE: The Holding Company forms the General Partner (a corporation or LLC) and transfers a nominal % of the Corporation’s stock to the General Partner as its capital contribution (Consider 0% GP: See Section 4.01 of the TX Limited Partnership Act).Holding Company(TX GP)[taxed as S Corp]100%General Partner(TX)[Disregarded]99.75%0.25%Corporation(TX)[Q Sub]
29Texas Franchise Tax Planning Conversion of Corporation to Limited PartnershipSTEP FOUR: Convert the Corporation into the Partnership (a Texas limited partnership) with General Partner as the sole general partner of the Partnership and the Holding Company as sole limited partner of the Partnership.Holding Company(TX GP)[taxed as S Corp]100%99.75%LPGeneral Partner(TX)[Disregarded for FIT]0.25%GPPartnership(TX)Disregarded for FIT