Choice of entity presentation 3.12.15
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The document presents an overview of entity formation considerations in the context of avoiding personal liability, highlighting the advantages and disadvantages of various business structures such as sole proprietorships, corporations, partnerships, and limited liability companies. It discusses the implications of 'piercing the veil,' which can lead to personal liability for business debts, and explains specific issues related to Texas franchise tax account status, including consequences of failing to register and the effects of entity status forfeiture. Key factors influencing personal liability and business operations, such as capital adequacy and adherence to legal formalities, are also outlined.
Choice of entity presentation 3.12.15
- 1. Choice Of Entity And How To Avoid Personal Liability Presented by Rick Lahr, CPA
- 2. I. Entity Formation Considerations A. Delaware Advantages 1. Among the most flexible business laws in the country 2. Court of Chancery considered an advantageous venue for business cases heard by only judges - no juries 3. Franchise tax only for companies not transacting business within the state 4. Shareholders/directors/officers/members/ managers are not required to be residents
- 3. I. Entity Formation Considerations B. Nevada Advantages 1. No state income tax and no fees on corporate shares 2. No franchise tax or personal income tax 3. Shareholders/directors/officers/members/ managers are not required to be residents
- 4. I. Entity Formation Considerations C. Doing Business In Other States 1. Foreign qualification where the entity has property/payroll/sales 2. Evaluate costs and ongoing fees in any other state(s)
- 5. I. Entity Formation Considerations D. Sole Proprietorship 1. Advantages a. Simple to create and easy to discontinue b. Singular decision making authority c. Minimum compliance required d. Easily converted, usually without triggering a taxable event 2. Disadvantages a. Unlimited personal liability b. Limited access to capital c. Most earned income is subject to the self- employment tax d. Maximum transparency = increased IRS examination risk
- 6. I. Entity Formation Considerations E. Corporation 1. Advantages a. Limited liability of shareholders b. Ability to attract investment capital c. Multiple classes of stock are permitted d. Wide range of nontaxable fringe benefits for shareholders who are employees 2. Disadvantages a. Formalities must be followed b. Potential for loss of control c. Double taxation of income d. May be subject to the accumulated earnings tax or personal holding company tax
- 7. I. Entity Formation Considerations F. General Partnership 1. Advantages a. Little governmental regulation b. Flexibility in management structure c. Single level of taxation d. Generally uniform state taxation 2. Disadvantages a. Unlimited liability of owners b. Difficulty in attracting outside investment c. Complexity of applicable law d. Losses limited to extent of basis
- 8. I. Entity Formation Considerations G. Limited Partnership 1. Advantages a. Limited liability for limited partners b. Centralized management c. Single level of taxation d. Generally uniform state taxation 2. Disadvantages a. Unlimited liability for general partner(s) b. Difficulty in transferring ownership c. Complexity of applicable law d. Losses limited to extent of basis
- 9. I. Entity Formation Considerations H. Limited Liability Company 1. Advantages a. Limited liability of members b. Ultimate flexibility in organizational and management structure c. Choice of taxation (if requirements met) – disregarded entity/C corporation/ S corporation/partnership d. Special allocations (when taxed as a partnership) 2. Disadvantages a. Potential for loss of control b. Compliance with applicable laws c. Complexity (when taxed as a partnership) d. State taxation issues
- 10. II. “Piercing The Veil” A. Effects 1. Owners/shareholders/members can be held personally liable for business debts 2. Creditors can pursue personal assets B. Judicial Imposition Of Personal Liability 1. No real separation between the company and its owners 2. Company actions were wrongful 3. Creditors suffered an unjust cost 4. Factors: a. Fraudulent behavior b. Failure to follow formalities c. Inadequate capitalization d. Commingling of business with personal assets
- 11. II. “Piercing The Veil” C. Alter Ego Status 1. Notice CC-2012-002 a. Imposition of liability on an entity by treating that entity as the taxpayer for tax collection purposes b. Analysis of state law to determine what rights a taxpayer has in property that the Government seeks to reach c. Analysis of federal law to determine whether a state-law right constitutes “property or rights to property”
- 12. II. “Piercing The Veil” C. Alter Ego Status 2. Internal Revenue Manual 5.17.2.5.7.1 (12- 12-2014) a. Commingling of entity and personal finances b. Unsecured interest-free loans between the entity and the owner c. Taxpayer exerts substantial control over the entity d. Entity is undercapitalized relative to its reasonable anticipated risks of business e. Failure to observe entity formalities f. Entity fiction presents an element of injustice or “fundamental unfairness”
- 13. II. “Piercing The Veil” C. Alter Ego Status 3. Oxford Capital Corp v United States, 211 F.3d 280 (5th Cir. 2000) 4. Estate of Strangi v Comm’r, 85 T.C.M. 1331 (2003), aff’d, 417 F.3d 468 (5th Cir. 2005) 5. Area counsel approval is required to issue an alter ego lien or levy 6. Federal district court suit may be advisable if there is uncertainty and to establish that the legally separate entity is an alter ego of the taxpayer
- 14. III. Texas Franchise Tax Account Status A. Right To Transact Business In Texas 1. Active 2. Active, eligible for termination/withdrawal 3. Forfeited 4. Not established 5. Franchise tax ended 6. Franchise tax involuntarily ended
- 15. III. Texas Franchise Tax Account Status B. Texas Notice Of Intent To Forfeit Right To Transact Business 1. Entity status forfeited if problems not resolved within 45 days of the notice date 2. Entity denied the right to sue or defend in a Texas court (except in a suit to terminate the entity’s registration with the Texas Secretary of State) 3. Each officer/ director/ partner/member/ owner is liable for the debts of the entity that are created before the privileges are revived
- 16. III. Texas Franchise Tax Account Status C. Texas Franchise Tax Public Information Report D. Texas Franchise Tax Ownership Information Report E. Annual Statement – Professional Association F. Periodic Report – Limited Partnership G. Tax Clearance Letter Request For Reinstatement H. Request For Certificate Of Account Status To Terminate A Taxable Entity’s Existence In Texas Or Registration I. Change Mailing Address/Phone Number For Franchise Tax Account J. Change Of Registered Agent And/Or Registered Office
- 17. III. Texas Franchise Tax Account Status K. Registering Out-Of-State Entities To Transact Business In Texas 1. Failure to register a. May be enjoined from transacting business in Texas on application by the attorney general b. May not maintain an action, suit, or proceeding in a Texas court until registered c. Subject to a civil penalty in an amount equal to all fees and taxes that would have been imposed if the entity has been registered when first required
- 18. III. Texas Franchise Tax Account Status K. Registering Out-Of-State Entities To Transact Business In Texas 2. Penalty for late filing a. Transacted business in Texas for more than 90 days b. Secretary of State may condition registration filing on payment of registration fee for each year, or partial year, that the entity transacted business in Texas without being registered
- 19. If you have any questions please feel free to contact Rick at: 214-635-2520 rlahr@gppcpa.com