Roman R.

Fichman Esq
TheLegalist.com

DISCLAIMER: The following presentation is meant for educational purposes only and is not intended to be legal advice and should not be construed as such. No representation is
made as to the accuracy or validity of information contained herein. Roman Fichman is admitted to practice in New York and Connecticut and is not making any representations as
to laws in other states.

Circular 230 Disclosure: Pursuant to U.S. Treasury Department Regulations, unless otherwise expressly indicated, any federal tax advice contained in this communication, is not
intended to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to
another party any tax-related matters addressed herein. Please consult a qualified professional for any specific tax advise.

all images are under a creative commons license with attribution

 This presentation will address:
* why incorporate?
incorporate?
* when to incorporate?
* the different entities to choose from
* new york or delaware?
* detailed summary charts

forming a business entity is not just

a set of papers

it's a mind set

Roman Fichman Esq

TheLegalist.com
 Forming an entity creates a
protective wall between the
entrepreneur and the
outside world and helps
anchor the relationship
between the founding
partners of the enterprise

by w upperhippo

Roman Fichman Esq

TheLegalist.com
 LIABILITY
Lars
Hammar
by Mr Tickle - Wachoo Wachoo Tribe Congressman

TAXES
cayusa

BUSINESS
NEEDS
Roman Fichman Esq
TheLegalist.com
 Business Liability
Liability resulting from breach of a duty, an
obligation arising from an action or a failure
to take action, in the normal course of a
business.

as a business you are liable for:

CONTRACTS

DEBTS

TORTS

Roman Fichman Esq

TheLegalist.com
 Incorporating gives the ability to take
advantage of:

Business deductions

Lower tax rates

Tax planning

Roman Fichman Esq

by Slightlynorth
TheLegalist.com
 Incorporating allows you to:

Enter into contracts, open
bank account, get credit,
have employees, etc.

Secure intellectual property

Have partners

Get investors

Sell the Business

Instill confidence with
By Roman Fichman

customer
Roman Fichman Esq
TheLegalist.com
 Generally, incorporation should occur sooner rather
than later

If your business is already up and running

If you are about to sign a contract or enter into
some sort of an obligation

If you are exposing yourself to the world

If you are creating intellectual property

If you are actively cooperating with partners /
future co-founders

If you need to hire employees

If you need to raise capital

Roman Fichman Esq

TheLegalist.com
 The alphabet soup of formation: “C” vs. “S” vs. “LLC” vs. “LLP”

Sole proprietorship

General Partnership

Limited Partnership

Corporation

Limited Liability Company

Roman Fichman Esq

TheLegalist.com

YOU are the business
therefore, you are personally liable

Can operate under a name other your own name
but need to file an assumed name certificate

The business income is recorded on your
personal income tax return

You pay unincorporated business tax (UBT)

need to probate upon death

OK for hobbies or for innocuous endeavors that

yield insignificant yearly income.

Roman Fichman Esq

TheLegalist.com

Can come into existence by merely cooperating
with someone.

Can operate under a name but need to register

Need to obtain a tax ID

No liability protection, pass-through tax and
subject to UBT tax

Exists only while the original set of partners
are together.

Roman Fichman Esq

TheLegalist.com
 The Good

Separate legal entity

Limited liability

Perpetual

Separation of ownership from management

Fringe benefits (incentive stock options, business
deductions)

The Bad

Corporate formalities must be observed

Risk of undercapitalization

May present challenging tax issues

Roman Fichman Esq

TheLegalist.com
 The good

Pass through taxation

Simple capital structure – only one class of shares

Simple management structure – shareholders vote according to their % of
ownership

The bad

Can't have more than 100 shareholders.

Can't have a nonresident alien as a shareholder.

Can't have more than one class of shares.

Can't have a shareholder who is not an individual (except an estate, certain trusts or
a “S” corp that wholly owns another “S” corp).

Must be careful not to co-mingle personal assets with corporate assets

IN NYC “S” corps are subject to the General Corporation Tax.

Investors shy away from “S” corps.

Note: Subchapter “S” needs to be elected, otherwise the default is a “C” Corporation

Roman Fichman Esq

TheLegalist.com
 The Good

Flexible capital structure – many classes of shares

Flexible management structure – can be run by a
board, officers and/or the shareholders

Easiest and most familiar form to investors

Clear rules on corporate veil piercing

Can easily get acquired or go public

The Bad

Double Taxation: The Corporation is taxed on
profits before dividend distribution to the
shareholders which is also taxed

Sarbane-Oxley and director liability

Formalities must be observed.

Roman Fichman Esq

TheLegalist.com
 Very flexible entity but with flexibility comes complexity

Hybrid form of Partnership / Corporation

Members own a “member interest” not shares

Pass-through tax treatment

Members share profits and losses and can allocate profit or losses among themselves

Profit and loss can be allocated differently than membership interest

Members and Managers have limited liability. (investors can participate in
management without losing their liability protection)

Flexible capital structure – can have preferred classes of “membership interests”

Flexible management structure - managers can operate like a corporation’s board of
directors and have different classes of managers

Under new IRS rules a LLC can elect to be taxed either as a partnership or as a
corporation

LLC can own 100% of the shares of a corporation

In NY LLCs have to publish their formation

In NYC LLCs are subject to the UBT

Members who are also managers may be subject to self employment taxes on profits

A one member LLC is taxed as a sole proprietorship

Roman Fichman Esq

TheLegalist.com
 P.C. – Professional Corporation
PLLC – Professional Limited Liability Company

Doctors, chiropractors, lawyers, accountants,

architects, engineers etc.

In New York and some other states all the
shareholders / directors / members must have a
license and the same type of license

Generally, the state licensing department must
approve the entity before formation documents
can be filed with the secretary of state.

Roman Fichman Esq

TheLegalist.com
 Why choose Delaware?

Very well developed body of corporate law and no jury decisions.

Often the annual franchise tax is lower (yearly tax on the shares the corporation issued)

One person can be the sole officer, director and shareholder of a company

No corporate taxes for non-resident companies

Privacy – shareholder information is kept private

Any attorney can represent a Delaware company (no need to be admitted in Delaware)

Why not choose Delaware

You still need to file a foreign entity certificate in New York

You still need to pay corporate taxes in the state where you are conducting business

Any legal disputes might lead you to court in Delaware which could be geographically inconvenient

Why choose New York

Because that’s the state where you conduct your business

New York also allows one person to act as the sole shareholder, director and officer

Privacy – shareholder information is kept private

Why not choose New York

Ten largest shareholders of a private corporation are personally liable for wages of any of its
employees

Roman Fichman Esq

TheLegalist.com
SUMMARY: LIABILITY & TAXES
Type Are shareholders and investors personally liable? How are taxes paid?

Sole Proprietorship Yes. Business income/profits / losses "pass through" to the

“owner “and are reported on the sole proprietor's
personal income tax return.

General Partnership Yes. Business income/profits / losses "pass through" to the

partners and are reported on the general partners'
personal income tax returns. Note that a partnership
will need to file an informational tax return with the
IRS.

Limited Partnership A limited partner is not personally liable unless Business income/profits "pass through" to the
the limited partner is active in the management partners and are reported on the general and limited
of the partnership. partners' personal income tax returns. The limited
Note that a limited partnership must have at least partnership will need to file an informational tax
one general partner who is personally liable for return with the IRS.
the business debts and obligations of the
partnership.
Corporation No. A "C" corporation is taxed on its profits before
dividends are distributed to the shareholders. The
Note that the shareholders must confirm to shareholders are then taxed on their dividends (this is
proper corporate practices, not to comingle known as double taxation).
assets & affairs, properly capitalize to maintain An "S" corporation is not subject to double taxation.
the “corporate veil” The profits or losses "pass through" to the
shareholders who report them on their individual tax
returns.
Limited Liability Company No . In some states members may be personally Business income/profits / losses "pass through" to the
liable up to the extent of their capital investment members of the limited liability company and are
in the Company. reported on their individual income tax returns.
A LLC will need to file an informational tax return with
Members must confirm to proper corporate the IRS. Also note that a LLC can elect to be taxed as a
practices, not to comingle assets & affairs, corporation.
properly capitalize to maintain the “corporate
veil”

Roman Fichman Esq

TheLegalist.com
The pros and cons of sole proprietorships, Corporations, Partnerships and LLCs
Type of Entity Advantages Disadvantages
Sole Proprietorship Simple Sole Proprietor personally liable.
Sole Proprietor reports profit or loss on his/her personal tax No tax benefits.
return.
General Partnership Simple and inexpensive to create Partners personally liable for business debts
Partners report their share of profit or loss on their personal tax Can be created merely by cooperating with others
returns
Limited Partnership Limited partners have limited personal liability for business debts General partners personally liable for business debts.
as long as they don't participate in the management of the Suitable mainly for investment companies such as venture capital firms,
partnership. private equity etc.
Limited Liability Partnership Mostly of interest to licensed professions such as lawyers, doctors, Partners remain personally liable for many types of business obligations
accountants etc. Often limited to licensed professions.
Partners aren't personally liable for the malpractice of other
partners
Partners report their share of profit or loss on their personal tax
returns
“S” Corporation Owners/shareholders have limited personal liability for business Limited number of shareholders. Non-resident aliens cannot be
affairs. shareholders.
Simple capital and management structures. Only one class of shares.
Owners report their share of corporate profit or loss on their Income must be allocated to shareholders according to their ownership
personal tax returns and can use losses to offset other income. interests
“C” Corporation Shareholders have limited personal liability for business affairs. Can be expensive to maintain (each outstanding share costs money)
Very flexible capital, corporate and management structures Paperwork can be burdensome
Fringe benefits can be deducted as business expense. Double Taxation
Owners can split corporate profit among the owners and the
corporation to lower taxes.
Professional Corporation Shareholders do not have personal liability for malpractice of other Generally, all shareholders must belong to the same profession.
shareholders. Could be subject to the “qualified personal service corporations" flat federal
All the other benefits of a corporation income tax rate of 35%.
Nonprofit Corporation Contributions to charitable corporation are tax-deductible Full tax advantages available only to groups organized for charitable,
The corporation does not pay taxes scientific, educational, literary or religious purposes
Fringe benefits can be deducted as business expense Property transferred to a non-profit corporation must remain there and
upon dissolution must be transferred to another non-profit.
Limited Liability Company Very flexible. Flexibility can result in a very complicated entity.
Members have limited personal liability for business affairs Members are personally liable to the extent of their capital investment
Profit and loss can be allocated differently than ownership Subject to the UBT.
interests.
LLCs can elect to be taxed as a partnership or corporation
Professional Limited Liability Similar advantages as a regular limited liability company but for Generally, all members must belong to the same profession.
Company licensed professionals. Similar caveats to a regular LLC.

Roman Fichman Esq

TheLegalist.com
 Roman@TheLegalist.com
(212) 337 - 9837

Roman Fichman Esq

TheLegalist.com