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Roman R. Fichman Esq TheLegalist.com DISCLAIMER: The following presentation is meant for educational purposes only
Roman R. Fichman Esq TheLegalist.com DISCLAIMER: The following presentation is meant for educational purposes only

Roman R. Fichman Esq TheLegalist.com

Roman R. Fichman Esq TheLegalist.com DISCLAIMER: The following presentation is meant for educational purposes only and

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.

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it'sit'sit'sit's aaaa mindmindmindmind setsetsetset Roman Fichman Esq TheLegalist.com

Roman Fichman Esq TheLegalist.com

Forming an entity creates a protective wall between the entrepreneur and the outside world and
Forming an entity creates a protective wall between the entrepreneur and the outside world and
Forming an entity creates a protective wall between the entrepreneur and the outside world and
Forming an entity creates a protective wall between the entrepreneur and the outside world and
Forming an entity creates a protective wall between the entrepreneur and the outside world and
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 wupperhippowupperhippowupperhippowupperhippo

Roman Fichman Esq TheLegalist.com

Lars Hammar by Mr Tickle - Wachoo Wachoo Tribe Congressman cayusa LIABILITYLIABILITYLIABILITYLIABILITY
Lars Hammar by Mr Tickle - Wachoo Wachoo Tribe Congressman cayusa
Lars
Hammar
by Mr Tickle - Wachoo Wachoo Tribe Congressman
cayusa
by Mr Tickle - Wachoo Wachoo Tribe Congressman cayusa LIABILITYLIABILITYLIABILITYLIABILITY TAXESTAXESTAXESTAXES

LIABILITYLIABILITYLIABILITYLIABILITY

TAXESTAXESTAXESTAXES

BUSINESSBUSINESSBUSINESSBUSINESS

NEEDSNEEDSNEEDSNEEDS

Roman Fichman Esq TheLegalist.com

TAXESTAXESTAXESTAXES BUSINESSBUSINESSBUSINESSBUSINESS NEEDSNEEDSNEEDSNEEDS Roman Fichman Esq TheLegalist.com
BBusinessBBusinessusinessusiness LiabilityLiabilityLiabilityLiability Liability resulting from breach of a duty, an

BBusinessBBusinessusinessusiness LiabilityLiabilityLiabilityLiability 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

course of a business. as a business you are liable for: CONTRACTS DEBTS TORTS Roman Fichman

Roman Fichman Esq TheLegalist.com

Incorporating gives the ability to take advantage of: Business deductions Lower tax rates Tax planning

Incorporating gives the ability to take advantage of:

Business deductions Lower tax rates Tax planning

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Roman Fichman Esq TheLegalist.com

Incorporating allows you to: Enter into contracts, open bank account, get credit, have employees, etc.
Incorporating allows you to: Enter into contracts, open bank account, get credit, have employees, etc.

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 customer

Get investors Sell the Business Instill confidence with customer Roman Fichman Esq TheLegalist.com By Roman Fichman

Roman Fichman Esq TheLegalist.com

By Roman Fichman
By Roman Fichman
Generally, incorporation should occur sooner rather than later If your business is already up and
Generally, incorporation should occur sooner rather than later If your business is already up and

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

/ future co-founders If you need to hire employees If you need to raise capital Roman

Roman Fichman Esq TheLegalist.com

TheTheTheThe alphabetalphabetalphabetalphabet soupsoupsoupsoup ofofofof formation:formation:formation:formation:
TheTheTheThe alphabetalphabetalphabetalphabet soupsoupsoupsoup ofofofof formation:formation:formation:formation:
TheTheTheThe alphabetalphabetalphabetalphabet soupsoupsoupsoup ofofofof formation:formation:formation:formation:

TheTheTheThe alphabetalphabetalphabetalphabet soupsoupsoupsoup ofofofof formation:formation:formation:formation: “C”“C”“C”“C” vs.vs.vs.vs. “S”“S”“S”“S” vs.vs.vs.vs. “L“L“L“L LC”LC”LC”LC” vs.vs.vs.vs. “LLP”“LLP”“LLP”“LLP”

Sole proprietorship General Partnership Limited Partnership Corporation Limited Liability Company

General Partnership Limited Partnership Corporation Limited Liability Company Roman Fichman Esq TheLegalist.com

Roman Fichman Esq TheLegalist.com

YOU are the business therefore, you are personally liable Can operate under a name other
YOU are the business therefore, you are personally liable Can operate under a name other

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.

death OK for hobbies or for innocuous endeavors that yield insignificant yearly income. Roman Fichman Esq

Roman Fichman Esq TheLegalist.com

Can come into existence by merely cooperating with someone. Can operate under a name but

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.

and subject to UBT tax Exists only while the original set of partners are together. Roman

Roman Fichman Esq TheLegalist.com

The Good Separate legal entity Limited liability Perpetual Separation of ownership from management Fringe

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

must be observed Risk of undercapitalization May present challenging tax issues Roman Fichman Esq TheLegalist.com

Roman Fichman Esq TheLegalist.com

The good Pass through taxation Simple capital structure – only one class of shares Simple
The good Pass through taxation Simple capital structure – only one class of shares Simple

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.

IN NYC “S” corps are subject t o the General Corporation Tax. Investors shy away from

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

Subchapter “S” needs to be elected, otherwise the default is a “C” Corporation Roman Fichman Esq

Roman Fichman Esq TheLegalist.com

The Good Flexible capital structure – many classes of shares Flexible management structure – can
The Good Flexible capital structure – many classes of shares Flexible management structure – can

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.

is also taxed Sarbane-Oxley and director liability Formalities must be observed. Roman Fichman Esq TheLegalist.com

Roman Fichman Esq TheLegalist.com

Very flexible entity but with flexibility comes complexity Hybrid form of Partnership / Corporation Members

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”

LLC can own 100% of the shares of a corporation

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

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

self employment taxes on profits A one member LLC is taxed as a sole proprietorship Roman

Roman Fichman Esq TheLegalist.com

P.C. – Professional Corporation PLLC – Professional Limited Liability Company Doctors, chiropractors, lawyers,
P.C. – Professional Corporation PLLC – Professional Limited Liability Company Doctors, chiropractors, lawyers,

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.

approve the entity before formation documents can be filed with the secretary of state. Roman Fichman

Roman Fichman Esq TheLegalist.com

Why choose Delaware? Very well developed body of corporate law and no jury decisions. Often
Why choose Delaware? Very well developed body of corporate law and no jury decisions. Often

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

of a private corporation are personally liable for wages of any of its employees Roman Fichman

Roman Fichman Esq TheLegalist.com

SUMMARY: LIABILITY & TAXES

TypeTypeTypeType

AreAreAreAre shareholdersshareholdersshareholdersshareholders andandandand investorsinvestorsinvestorsinvestors personallypersonallypersonallypersonally liable?liable?liable?liable? HowHowHowHow areareareare taxestaxestaxestaxes paid?paid?paid?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 the limited partner is active in the management of the partnership.

Business income/profits "pass through" to the partners and are reported on the general and limited 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 the business debts and obligations of the partnership.

No.

return with the IRS.

Corporation

A "C" corporation is taxed on its profits before dividends are distributed to the shareholders. The shareholders are then taxed on their dividends (this is known as double taxation). An "S" corporation is not subject to double taxation. The profits or losses "pass through" to the shareholders who report them on their individual tax returns.

Business income/profits / losses "pass through" to the members of the limited liability company and are reported on their individual income tax returns. A LLC will need to file an informational tax return with the IRS. Also note that a LLC can elect to be taxed as a corporation.

Note that the shareholders must confirm to proper corporate practices, not to comingle assets & affairs, properly capitalize to maintain the “corporate veil”

No . In some states members may be personally liable up to the extent of their capital investment in the Company.

Members must confirm to proper corporate practices, not to comingle assets & affairs, properly capitalize to maintain the “corporate veil”

Limited Liability Company

properly capitalize to maintain the “corporate veil” Limited Liability Company Roman Fichman Esq TheLegalist.com

Roman Fichman Esq

TheLegalist.com

The pros and cons of sole proprietorships, Corporations, Partnerships and LLCs

TypeTypeTypeType ofofofof EntityEntityEntityEntity Sole Proprietorship

General Partnership

Limited Partnership

Limited Liability Partnership

AdvantagesAdvantagesAdvantagesAdvantages Simple Sole Proprietor reports profit or loss on his/her personal tax return. Simple and inexpensive to create Partners report their share of profit or loss on their personal tax returns Limited partners have limited personal liability for business debts as long as they don't participate in the management of the partnership.

Mostly of interest to licensed professions such as lawyers, doctors, accountants etc. Partners aren't personally liable for the malpractice of other partners Partners report their share of profit or loss on their personal tax returns

DisadvantagesDisadvantagesDisadvantagesDisadvantages Sole Proprietor personally liable. No tax benefits.

Partners personally liable for business debts Can be created merely by cooperating with others

General partners personally liable for business debts. Suitable mainly for investment companies such as venture capital firms, private equity etc.

Partners remain personally liable for many types of business obligations Often limited to licensed professions.

“S” Corporation

Owners/shareholders have limited personal liability for

business

Limited number of shareholders. Non-resident aliens cannot be

affairs. Simple capital and management structures. Owners report their share of corporate profit or loss on their personal tax returns and can use losses to offset other income.

shareholders. Only one class of shares. Income must be allocated to shareholders according to their ownership interests

“C” Corporation

Shareholders have limited personal liability for business affairs. Very flexible capital, corporate and management structures Fringe benefits can be deducted as business expense. Owners can split corporate profit among the owners and the corporation to lower taxes.

Can be expensive to maintain (each outstanding share costs money) Paperwork can be burdensome Double Taxation

Professional Corporation

Shareholders do not have personal liability for malpractice of other shareholders. All the other benefits of a corporation

Generally, all shareholders must belong to the same profession. Could be subject to the “qualified personal service corporations" flat federal income tax rate of 35%.

Nonprofit Corporation

Limited Liability Company

Professional Limited Liability Company

Contributions to charitable corporation are tax-deductible The corporation does not pay taxes Fringe benefits can be deducted as business expense

Very flexible. Members have limited personal liability for business affairs Profit and loss can be allocated differently than ownership interests. LLCs can elect to be taxed as a partnership or corporation Similar advantages as a regular limited liability company but for licensed professionals.

Full tax advantages available only to groups organized for charitable, scientific, educational, literary or religious purposes Property transferred to a non-profit corporation must remain there and upon dissolution must be transferred to another non-profit.

Flexibility can result in a very complicated entity. Members are personally liable to the extent of their capital investment Subject to the UBT.

Generally, all members must belong to the same profession. Similar caveats to a regular LLC.

all members must belong to the same profession. Similar caveats to a regular LLC. Roman Fichman

Roman Fichman Esq TheLegalist.com

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

Roman@TheLegalist.com (212) 337 - 9837

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

Roman Fichman Esq TheLegalist.com