Tax Analysis of Entity Types
Allied Tax and Consulting LLC provides guidance in determining which type of business entity is best suited to achieve the client's goals. In assisting our clients in making this decision, we utilize working relationships developed with local attorney’s in consideration of the amount of asset protection needed, personal exposure, state and local laws or regulations applicable to the client's business, organizational structure, and tax implications. We also handle the filing of any elections required by the IRS as well as annual reporting requirements for each entity.
No matter which entity type is selected, a C-corporation, S-corporation, general partnership, limited partnership, limited liability company, limited liability partnership, professional association, or other type, we are careful to consider the effect on who will bear the burden of the taxes paid by the entity, and for liability of debts and obligations of the entity.
The Different Entity Types
The most common and the simplest form of business is the sole proprietorship. In a sole proprietorship, a single individual engages in a business activity without necessity of formal organization.
A general partnership is created when two or more persons associate to carry on a business for profit. A partnership generally operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement.
A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. The owners of a corporation are called "shareholders." The persons who manage the business and affairs of a corporation are called "directors." However, state corporate law does provide for shareholders to enter into shareholders' agreements to eliminate the directors and provide for shareholder management.
An "S" corporation is not a matter of state corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an "S" corporation by filing an election with the Internal Revenue Service.
The limited liability company (LLC) is not a partnership or a corporation but rather is a distinct type of entity that has the powers of both a corporation and a partnership. Depending on how the LLC is structured, it may be likened to a general partnership with limited liability, or to a limited partnership where all the owners are free to participate in management and all have limited liability, or to an "S" corporation without the ownership and tax restrictions imposed by the Internal Revenue Code. The owners of an LLC are called "members." A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a partnership. As a result of federal tax classification rules, an LLC can achieve both structural flexibility and favorable tax treatment.
A Texas limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. While the partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State.
In order to limit the liability of its general partners, a general or limited partnership may opt to register as a limited liability partnership.
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