SP, GP, LLC, LLP, C Corp, S Corp: Decoding the Alphabet Soup of Incorporation

Dr. Yousem’s project was funded through an RSNA Educational Grant A Special Thank You to: Dr. David M. Yousem, M.D., M.B.A.
Professor, Department of Radiology
Vice Chairman of Program Development
Director of Neuroradiology
Johns Hopkins Hospital for allowing the use of his material/content in this presentation Dr. Yousem’s online lecture series can be viewed at: http://webcast.jhu.edu/mediasite/Catalog/pages/catalog.aspx?catalogId=7e18b7d5-9c63-487e-aaf1-77a86f83b011 Dr. Yousem’s project was funded through an RSNA Educational Grant

Why should I care? Protection of personal assets Limiting liability Possible taxation benefits Selling stock to raise funds Durability Corporation continues indefinitely Transfer of ownership Corporation has its own credit and credit rating

Limited Liability Partnership, LLP Corporation Types of Businesses Sole proprietorship General Partnership Limited Liability Partnership, LLP Corporation C Corporation S Corporation Limited Liability Company, LLC Professional Limited Liability Company, PLLC Pass-through entity

Sole Proprietorship Single owner No legal distinction between the person and the business All assets owned by the person All profits pass to the owner – taxes paid on owners personal tax return Unlimited personal liability No durability Example: After the death of the owner the business ceases to exist

General Partnership Association of 2 or more persons Generally created by partnership agreement In the US a partnership is legally recognized as a separate entity from the persons making it up No protection from personal liability Owners are personally liable for all debts, taxes, and liabilities of the business Profits shared between partners as specified in the partnership agreement – taxes are paid on each partners tax return Decision making powers are specified in the partnership agreement No durability Technically a partnership dissolves after death of a member

Limited Partnership, LP One or more General Partners Run the business, have decision making authority Personally liable for all debts, taxes, malpractice One or more Limited Partners Limited partners generally do not get involved with day to day decisions No personal liability, only liable up to their investment Example: Jane (general partner) owns a building and Joe (limited partner) invests money with Jane. Jane shares the buildings profits with Joe. If the building burns down Joe would only lose his investment and would not be liable for additional damages.

Limited Liability Partnership, LLP All partners have limited liability You are not personally liable for debts and taxes of the business You are not responsible for your partners negligence or malpractice You are responsible for your own negligence or malpractice Different from a corporation by the fact that all partners retain decision making capacity Typically used by lawyers, accountants and architects

C-Corporation Separate legal entity, created to maximize profit and limit liability Profits are double taxed The corporation is taxed on its income The dividends it pays to its shareholders are also taxed Limited corporate liability Shareholders only lose their investment if the corporation fails Personal liability Malpractice is not covered by corporate liability Small portions of the company owned by shareholders (i.e. stock) No limit to number of shareholders The may different types of stock (preferred stock) Additional information IRS Publication 542

S-Corporation Separate legal entity from its shareholders Annual state tax/fee for existence Not double taxed Corporate income is divided among the shareholders Individual shareholders must declare income on their individual taxes Limited liability same as a C-Corporation Different shareholder structure from a C-Corporation Only one type of share (no common or preferred stock) Limited to 100 shareholders or less Shareholders must be U.S. Citizens or residents Profits are allocated to shareholders based on their investment in the business Additional information IRS Publication 542

How is a corporation formed C-Corporation Name is chosen Initial board of directors appointed File paperwork Create bylaws First board of directors meeting Issue stock S-Corporation Same as for C-Corporation, but must meet special requirements as outlined in the previous slide Conversion from a C-Corporation to an S-Corporation must be by unanimous shareholder vote If an S-Corporation fails to fulfill the special requirements of an S-Corporation it will automatically revert to a C-Corp and be taxed as such

Limited Liability Company, LLC Blend of aspects of a partnership (or sole proprietorship if there is a single owner) and a corporation A LLC is not considered a corporation Limited liability Only members’ investments are at risk Taxation by default is similar to a sole proprietorship or general partnership A LLC can elect to be taxed as a C-Corp or S-Corp Some states allow formation of PLLC (professional limited liability company) for professions that require a license to operate (such as doctors or lawyers)

A few words about limited liability Financial liability for the companies debts is limited to a fixed sum Most commonly the sum of the person’s investments, you can’t lose more money than you have invested If a plaintiff sues a corporation they are suing the corporation and not an individual You are still liable for your own actions Limited liability does not protect you from malpractice It does protect you from your partners malpractice (in the case of a LP or LLP) or other shareholders malpractice (in the case of a corporation)

Aims to avoid double taxation Pass-Through Entity Aims to avoid double taxation The entity files tax returns, but does not actually pay taxes Only the investors are taxed Form K-I is issued to each investor reporting their individual earnings/ losses

In a nutshell Limited liability Taxation LP, LLP, LLC, and incorporation all provide their partners and shareholders with limited liability protection Sole proprietorships and general partnerships do not provide this protection In any of these business types you are still liable for your own actions/malpractice Taxation C-Corporations are “double taxed” They pay tax on corporate income Their shareholders pay tax on the dividends The remainder of the business types are “pass through” which means the profits are taxed based on the individual’s tax return

In a nutshell (continued) Decision making capacity In a partnership all partners are part of decision making process In a corporation the board of directors holds the decision making power Paperwork C-corporations and S-corporations require the most paperwork to initially set up the business and to keep it going i.e. usually requires an accountant and perhaps a lawyer LPs and LLPs Less paperwork Technically sole proprietorships and general partnerships do not require the filing of any paperwork with the federal or state government

In a nutshell (continued) Additional information Partnerships need to be made up of at least two people S-corporations No more than 100 shareholders, all US citizens or residents Only 1 type of stock C-corporations Unlimited shareholders, multiple classes of stock

References “Business of Radiology”. Lecture series by Dr. David Yousem. http://tinyurl.com/yousem-biz. Accessed December 2010 “LLCs, corporations, partnerships, etc.” www.nolo.com Accessed December 2010 “Publication 542" (PDF). Department of the Treasury, Internal Revenue Service. February 2006. http://www.irs.gov/pub/irs-pdf/p542.pdf. Retrieved December 2010.