BUSINESS ENTITIES
If you are currently operating a business in Florida or Ohio, you already have a business entity. Whether you are starting a new business or evaluating your current business, you should be sure to choose the entity best suited for you and your needs. In order to decide properly what kind of business structure works for you, you need to carefully consider the following:
How do you want to structure the control within your business?
How have you protected yourself from liability?
How are you currently being taxed and is there a way to minimize tax on your business?
How do you want your business to operate if/when you retire?
Below, I’ve included some basic differences in a few entities.
Sole Proprietorship
A Sole Proprietorship consists of one person carrying on a business for profit. This entity is easily recognized and regularly used. The individual IS the entity and for liability purposes, there are no differences between the assets of the individual and the assets of the entity. Often, the sole proprietorship has no official documents as simply has one or two bank accounts in the name of the individual followed with a “dba” (doing business as) designation.
Because the sole proprietorship is the individual, the individual will report taxes on the
individual’s return. The individual, not the sole proprietorship, is subject to taxation. Creditors of the sole proprietorship are creditors of the individual. There is no liability protection with a sole proprietorship.
Corporation
“C” Corporations are one of the oldest entities. At the top of the corporate structure is the board of directors. The Board members are the ultimate managers of the corporation. The Board controls major decisions and leaves the day to day activities being run by Officers of the corporation, who are subject to replacement by members of the board. The shareholders own an interest in the corporation and may or may not possess the ability to vote on issues, such as merger or sale, depending on the corporate structure and bylaws. The board members and officers may or may not be shareholders in the corporation. The shareholders own “shares” or “stock” in the corporation. There can be many different classifications and ownership can be “preferred” or “common”—entitling the holder to different distributions and voting rights within the corporation.
A corporation can have an unlimited number of shareholders and often have an open market for its shares. A corporation is a separate entity for tax and liability issues. This is beneficial in that, the members of the corporation are not personally liable for actions taken as the corporation—in most cases and absent fraud, only the corporate assets are at risk in litigation. However, because a corporation is an entity separate and apart from its members, it is also subject to tax and like many other entities, carries its own tax I.D. number. Dividends or distributions made to shareholders are taxed at the corporate level first, and then taxed again as income to the individual shareholder—the “double tax” often mentioned in corporate issues.
“S” Corporation
An “S” Corporation is similarly structured to the “C” corporation. However, there are important distinctions that must be maintained in order for a corporation to retain its preferred “S” status. Unlike a “C” corporation, an “S” corporation may only have one class of stock. The stock may be voting or non-voting or a combination, but they must still be the same classification. An “S” corporation, unlike the “C” corporation, may only have one hundred shareholders that are U.S. citizens, resident aliens, estate, or certain trusts or tax-exempt organizations.
An “S” Corporation is a corporation in many respects; however, it differs in that the “S” corporation elects to be taxed under subchapter “S” of the Internal Revenue Code. In this way, the corporation is not subject to taxation at the corporate level—it becomes a “pass-through” or “flow through” entity, which means that the income is taxable only on the shareholder level and only taxed once. For liability purposes, an “S” corporation is similarly situated to the “C” Corporation, in that its members are not personally liable for the acts of the “S” Corporation.
General Partnership
A General Partnership is simply two or more persons carrying on business for a profit. Like the corporation, the general partnership is an old and well settled entity. There can be any number of members and many different ways to structure. In the absence of an agreement otherwise, each partner is entitled to share equally in the profits and losses of the partnership. Each partner, however, is liable for the acts of the other partners in the business. In Florida as well as in Ohio, general partners are jointly and severally liable for the acts of the partnership. General partnerships offer little liability protection. Creditors, however, are entitled to economic rights of the partnership/partner only and cannot force themselves into management of the partnership.
General partnerships are pass through entities for tax purposes. The Partnership itself may carry a tax identification number, but the partners individually report the income on his or her own tax returns. The general partnership itself does not pay tax on its income, though the business may be subject to other taxes.
Limited Partnership
A Limited Partnership is similar to the General Partnership in structure; however, it is a recent creature of statute. Like the “S” corporation, the Limited Partnership must be proactive in seeking its status. There are general Partners who remain responsible for the overall managing and splitting of the losses and profits. There are also limited partners who may instead receive a salary and are not permitted to manage the key aspects of the partnership.
A Limited Partnership provides limited liability to its limited partners. As long as the limited partner does not otherwise hold himself out as a general partner nor does he take on the duties of a general partner, he remains free of personal liability for the acts of the general partners and partnership. The general partners, however, are still liable. A Limited Partnership is taxed and subject to creditors in the same manner as a General Partnership.
Limited Liability Partnership
A Limited Liability Partnership is also a recent creature of statute in Ohio and Florida. A Limited Liability Partnership is more akin to a general partnership in structure and style, but partners are not liable for the acts, errors, and omissions of other partners. Each partner is liable for his own actions as a partner. There are no limited partners, in that all partners may participate actively in the management and control of the partnership. In the absence of agreement, all partners are entitled to share equally in the profits and losses as well as the assets of the partnership, regardless of the assets original source.
Limited Liability Partnerships are similarly taxed as general partnerships—income flowing through the partners themselves. Limited Partnerships are best suited to professional practices: such as dentistry, CPAs, and law firms.
Limited Liability Company
A Limited Liability Company is a relatively new business model that may consist of any number of individuals. An LLC may be formed in Ohio and Florida without an operating Agreement. Although an LLC may be structured in any number of ways, in the absence of agreement, the LLC will be run by majority consent of its members. LLC can also be manager-managed. In this way, LLC would be similar to that of a limited partnership—the managers, like the general partners, make the decisions on behalf of the LLC and the other members may have only economic rights in the LLC. LLCs consist of shares and shares may be organized in different ways (managing shares, limited shares, etc.). Members and managers are not personally liable for the acts of the Limited Liability Company and vice versa. Creditors of the LLC can only reach the assets of the LLC and are not entitled to participate in management of the LLC, without consent of its members.
An LLC is a pass through entity for tax purposes and its members report the income on their individual returns. An LLC may consist of a single member or multiple members.
Special case in Florida with single member LLCs. The Florida Supreme Court recently upheld a creditor’s right not only to the economic interest of the single member, but also, the right to become to member, as a single member LLC arguably can have no dissenting members after the forming individual has lost his interest. This is NOT the case in Ohio with single or multiple member LLCs and also not the case in Florida with multi-member LLCs, both of which provide that a charging order is the sole remedy available to the creditor of these LLCs.
Are there any other aspects of business entities to consider? Of course. After individual
consultation, Roth and Bacon Attorneys is in a better positions to address your specific needs. As always, your business plan should work with your estate plan. Owning an interest in any of the above entities, while providing liability protection and other advantages, does nothing to protect you from the Probate Court when you pass away. Revocable Living Trusts and other methods are often used in conjunction with your business plan to ensure your business interests pass according to your wishes.
Copyright 2011@ Jessica B. Moon
Further Business Structures Defined
Last time we discussed corporations and how they operated. This current series of articles is devoted to the various types of business entities which are available in today’s marketplace.
In general, a person may elect to do business as a “dba” which is an acronym for “doing business as.” This is a legal fiction as far as the law is concerned. The business is usually tax identified using the person’s individual social security number as a tax identification. The profits of the business are individual to the person and so are the losses. If anything goes wrong with the business, the person can be sued individually and his assets attached if there is a subsequent judgment against him or the business.
Two or more persons may also form a partnership to conduct business. In a general partnership there are two or more partners. The partnership will often have a separate tax identification number, but will file an informational income tax return only. The profits and losses of the partnership are distributed to the individual partners as their interests appear and they pay the income tax individually at their own tax rates. If there is any liability asserted against the partnership the assets which the partnership owns may be attached by its creditors. In addition, the partners are usually individually liable for the acts of the partnership and they may also be sued individually by a creditor.
In general partnerships each partner usually has the ability to legally bind the partnership and to act legally for the partnership. As in all business arrangements, it is a good idea to only have a partnership with those persons you trust.
In recent years Ohio has enacted legislation allowing for the creation of limited partnerships. In a limited partnership (as distinguished from a general partnership) there must be at least one or more general partners. These persons have the same rights, duties and liability as a regular partner in a general partnership. These general partners may bind the partnership legally and if there is a creditor’s lawsuit against the partnership, the general partner’s individual assets may be subject to attachment by this creditor for the acts or omissions of the partnership.
The distinguishing characteristic of a limited partnership is the addition of one or more limited partners. These limited partners, unlike the general partner, have little or no actual control over the actions of the partnership and do not share in management decisions. These limited partners are generally entitled to receive pro rata profit distributions from the partnership as their partnership interests appear. However, if there is a successful lawsuit against the partnership or the partnership has incurred obligations which it cannot satisfy, the individual assets of the limited partner are not subject to attachment by the creditor. The investment which the limited partner made into the partnership may be attached, but his or her individual assets are usually not reachable by the creditors of the partnership.
There are other characteristics of limited partnerships which make them attractive as estate planning vehicles. Limited partnership shares if structured properly may not allow for a limited partner to transfer his or her ownership share to any person other than an existing partner of the partnership or some other defined family member. Creditors have an unusually difficult time successfully attaching limited partnership shares from a limited partner. Divorce protections are usually built in allowing for the partnership share to remain within the defined group if a divorce occurs.
For gift tax reasons for the reasons cited above, limited partnership shares may not be as valuable to the recipients as would a direct transfer of cash. Accordingly, if structured properly, the donor giving the gift may have gift tax advantages and be able to transfer more limited partnership interests using less of his or her gift tax exclusion amounts as a credit to offset these transfers.
Another business vehicle is a limited liability company. Whereas limited partnerships generally refer to their representative ownership units as partnership shares, limited liability companies refer to their representative ownership units as membership shares.
In many respects limited liability companies mirror the business aspects of a partnership, with one key difference. In a limited liability company, the members are not usually individually liable for the acts of the limited liability company. This key difference distinguishes a limited liability company’s members from the partners in a limited partnership. In a limited partnership the general partner will generally remain individually liable for the acts of the partnership and the limited partners will remain liable to third parties in direct correlation to the amounts they have invested into the partnership. Limited liability companies may have multiple members but unlike a partnership, a limited liability company may have just one member if it so elects.
Also limited liability companies may elect to be taxed as stand alone business entities or in a manner more similar to a partnership.
There are other variations on this theme and multiple combinations of these entities which a person engaged in business may elect to use in conducting his or her business.
This is a short and by no means exhaustive synopsis of these business structures.
This article was written by David F. Bacon, Attorney and Ohio State Bar Association Board Certified Specialist in probate, trust and estate planning. David Bacon, Jeff Roth, and Jessica Moon are Members in Roth & Bacon Attorneys with offices in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ David F. Bacon 2013
A lot of clients start our meetings with “what can I do to protect myself from liability?” While all of them understand that having “liability” may be a bad thing, most do not know what exactly that means. Liability is just another way of saying responsibility. Responsibility may come in many forms: in business, in personal affairs, and through the various relationships we establish in our daily lives. While there are many ways to determine who is liable in any given situation, by far, the strongest determining factor is: who has control?
Where Creditors arise:
A client who has undertaken little, if any, planning may be involved with a number of scenarios in his life: he may run a small business, he may have three or four children with his wife, he may participate in extracurricular activities, and he may travel on a daily basis. All of these activities create relationships, and with these relationships, he creates and establishes creditors. If he has done no planning and established no barriers—his creditors do not recognize his personal affairs from his business affairs. This means that any creditor of his may assert a claim against his interest in assets that he owns in order to satisfy a debt.
Some of you may think, why would I need to plan? I don’t break the rules, I pay my bills, I otherwise conduct myself lawfully; I do not need to be concerned with creditors. While all of that may be good and true for you—that may not be enough to protect you against a creditor’s claim. What if you were in an accident? What if a partner of yours suddenly finds himself in the middle of a divorce? There are many unforeseen scenarios that can turn an otherwise simple estate upside down.
How to plan:
There are a few ways you can plan to provide protections against creditors. One of the first ways is to minimize your exposure and separate your creditors—establish separate business entities to hold your separate business assets. By establishing and using business entities, you can ensure business creditors may only reach business assets; likewise, personal creditors may only reach personal assets. The more separation you have in your affairs, the smaller the “pot” becomes for recovery purposes, as you’ve segregated your former single estate into various little portions, each exposed only to its own specific creditor. Further, business entities are often structured so business creditors may only have the ability to get at monies finally distributed from the entity; creditors then enjoy no ability to control the business’ decision to distribute those monies.
Still need more protection? Another way to plan is through the use of irrevocable trusts in your estate. The only way to truly limit your exposure to liability is not to own anything; after all, who can get blood from a stone? However, clients are often loathe to divest themselves of all their assets and understandably so. While giving all of your assets away may not be practical, there are ways to accomplish ownership and use of assets without control. And if you don’t have control over something, neither do your creditors.
Any liability planning in your own estate should be carefully considered and undertaken with counsel.
This article was written by Jessica B. Moon, Attorney licensed in Ohio and Florida. David Bacon, Jeffrey Roth, and Jessica Moon are members in the law firm of Roth and Bacon Attorneys, LLC. Their Offices are located in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ Jessica B. Moon 2013.
At Roth & Bacon, we work with many clients and their business entities—all the way from large employers who may employ fifty or more to single member entities. We these clients, we focus on maintaining their businesses and framing up their estate plans to complement any business plans they have laid out. Invariably, a conversation on one of those topic(s) leads to the other. I am often surprised by Attorneys who handle some business planning but no estate planning for their clients and vice versa. In my area of practice, I have found that practice in either area requires at a minimum basic knowledge in both business and estate planning.
In estate planning, our clients focus on how their assets will pass and who those assets will pass to. We prepare the necessary documents to pass title and interest and to avoid unnecessary administration costs where we can. We also ensure that there are always multiple contingencies in the event that the initial plans cannot be fulfilled, due to death or incompetency. We also prepare documents that allow others to step in during the client’s lifetime, in the event that client himself has lost the ability to speak for himself. In this way, the client and his estate remain a personal matter and one that is entrusted solely to those whom the client has names and trusts.
Business planning requires much of the same focus. With business clients, we need to ask the right questions of our clients: will this business continue after you pass away?; who will control the interests and how will they receive that control?; will this transfer of ownership occur upon stated events, sales, transactions, during life or upon death? With these issues, we need to carefully consider many of the same issues that we do in estate planning, i.e.: the client’s age, capacity, family, and surrounding, trusted advisors.
Business Entities, like estates, are not all the same; each one comes with its own complexities and issues to consider. While some interests may easily pass in a generic distribution plan, most do not. Each plan should specifically address the internal framework of the entity and the other available assets in the client(s) estates. Our plans necessarily depend on whether or not this business is closely held by family members only, publicly traded, whether the business is a corporation, a limited liability company, or a limited partnership, among others. In business, like estate planning, we ask whether or not there are insurance policies in place to affect the smooth transfers of interest. We must also address the tax implications of any proposed transfers of both estate assets and business interests. These are all reasons that basic knowledge in many areas is a prerequisite to good planning in either.
Roth & Bacon believes that we cannot properly plan for our clients without all the information. We need to know the client fully and the players/individuals on each side (both for business and for the estate). At Roth & Bacon, we insist on working with the client’s CPA or accountant, where applicable, in order that everyone is on the same page with regard to the client’s plans and goals. We believe any estate plan should flow seamlessly with a client’s business plan and vice versa. Does your attorney? If not, perhaps you should consider speaking with one who does.
This article was written by Jessica B. Moon, Attorney licensed in Ohio and Florida. David Bacon and Jeffrey Roth, and Jessica Moon are Member Attorneys in Roth & Bacon Attorneys, LLC. Their Offices are located in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ Jessica B. Moon 2013.
BUSINESS ENTITIES
LIMITED PARTNERSHIPS AND LLCs
PERSONAL AND BUSINESS LIABILITY
BUSINESS ENTITIES AND ESTATE PLANNING:
A NECESSARY
RELATIONSHIP
The purpose of this site is not to provide personal legal advice. This information is general and is not a substitute for individual legal services. Roth and Bacon Attorneys, LLC encourages you to obtain estate planning services and advice from an attorney, CPA, or other qualified individual.