Choice Of Entity And The Small Business

<p>Beyond the pure tax aspects, small business clients should be advised that tax laws have a tendency to change even when they are characterized as permanent. If the small business converts to C corporation status, problems can result if it turns out that the conversion was ill-advised or the rules change in the future. For example, once an S corporation converts to C corporation status, it cannot convert back to an S corporation for five years.<br /> <br /> Further, if the owner does decide to convert back to an S corporation in the future, taxes on built-in gains may apply and issues surrounding accumulated earnings and profits arise.<br /> <br /> Accounting issues can arise if the pass-through entity is required to change its accounting method as a result of the conversion. Under the new legislation, any accounting adjustments under IRC Section&nbsp;481(a) that are required because of the conversion of an &ldquo;eligible terminated S corporation&rdquo; (such as changing from the cash to accrual method of accounting) must be taken into account ratably during the six tax years beginning with the year of the change. Eligible terminated S corporations are basically S corporations that convert within two years of the passage of the tax legislation, where the ownership structure remains the same. <em>&lt;em&gt;See&lt;/em&gt;</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9044">9044</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9058">9058</a> for a more in-depth discussion of small business accounting issues post-reform.</p><br />

<div class="Section1"><br /> <br /> Sole proprietors and S corporations with only a single shareholder may wish to examine their choice of entity decisions to more fully take advantage of the Section&nbsp;199A deduction for QBI (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8931">8931</a>). Generally, reasonable compensation paid by an S corporation to its shareholder is included in the W-2 wage limit and excluded from QBI.<a href="#_ftn1" name="_ftnref1">¹</a> A sole proprietor is not subject to similar requirements (the Section&nbsp;199A proposed regulations make clear that the reasonable compensation rule applies only in the S corporation context).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> If the business&rsquo; income for the year exceeds the relevant threshold levels, these rules would maximize the QBI deduction if the business was organized as an S corporation. If income fell below the relevant thresholds, the sole proprietor would obtain the larger QBI deduction, as illustrated in the examples below.<br /> <p style="padding-left: 40px;"><em>Example</em>: A sole proprietorship and S corporation with one shareholder each generate $500,000 in QBI for the year, and neither business has any qualified property.&nbsp;The S corporation shareholder pays himself reasonable compensation for the year of $100,000.&nbsp;The sole proprietor is not required to pay himself a wage. Both businesses are subject to the W-2 and UBIA limitations because their income exceeds the relevant threshold levels.&nbsp;The S corporation&rsquo;s QBI deduction for the year is limited based on the statute&rsquo;s W-2 limitation, so is limited to $50,000 (50&nbsp;percent of W-2 wages, i.e., the shareholder&rsquo;s reasonable compensation).&nbsp;The sole proprietor&rsquo;s QBI deduction (also phased out) is zero, because wages and UBIA both equaled zero.</p><br /> <p style="padding-left: 40px;"><em>Example:</em> If each business described in the example above instead earned $100,000 (i.e., below the income thresholds), the W-2 wage and UBIA limitations would not apply. Assume the S corporation shareholder paid himself $40,000 in reasonable compensation for the year.&nbsp;The sole proprietor&rsquo;s QBI deduction is $20,000 (simply 20&nbsp;percent of $100,000).&nbsp;The S corporation shareholder must reduce his QBI for the year by the amount of reasonable compensation ($40,000) before calculating the deduction.&nbsp;Thus, his QBI deduction for the year is only $12,000.</p><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;199A(c)(4)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.199A-3(b)(2)(ii)(H).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For many pass-through business owners, the choice of entity decision may be strongly impacted by whether the business intends to distribute most of its income to the owners each year (as many small businesses do). Regardless of the form the distribution takes, the double tax structure that arises in the C corporation context will often result in a C corporation generating a higher effective tax rate, depending upon the business owner&rsquo;s income tax bracket.<br /> <br /> If a C corporation does not distribute most of its income, the accumulated earnings tax and personal holding company tax must be considered (see Q Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8960">8960</a> and Q Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8961">8961</a>). Both taxes are designed to prevent a C corporation from stockpiling earnings within the corporate structure in order to avoid tax at the individual level. The 20 percent accumulated earnings tax applies when the corporation accumulates earnings beyond the reasonable business needs of the corporation. The 20 percent personal holding company tax can also become important for closely held corporations that derive more than 60 percent of adjusted gross income from passive investments (such as dividends, interest and rent).<br /> <br /> Businesses that would most likely benefit from C corporation structure after enactment of the 2017 tax reform legislation generally include capital-intensive businesses, such as a manufacturing company that has a legitimate business reason for leaving large amounts invested within the corporation (e.g., for purchasing and maintaining equipment).<br /> <br /> </div><br />

<div class="Section1"><br /> <br /> Under the 2017 tax reform legislation, C corporations are now subject to a flat 21&nbsp;percent income tax rate at the entity level and pass-through business income is taxed at the individual level, where a maximum 37&nbsp;percent rate now applies. While this seems simple on the surface, the true calculus post- tax reform is not nearly so straightforward.<br /> <br /> C corporation income must eventually be distributed by the corporation to its owners, where it is then taxed a second time, at the individual level. If the income is salary, the maximum 37&nbsp;percent ordinary income tax rate may apply, but the corporation may deduct the payment. If the distribution comes in the form of dividends, a maximum long-term capital gains rate of 23.8&nbsp;percent (including net investment income tax) may apply and no deduction is permitted.&nbsp;This structure makes dividend distribution more appealing, but even the effective tax rate on dividends creeps up to 39.8&nbsp;percent when the double tax is factored in. If a sale of the C&nbsp;corporation is contemplated, the double tax issue arises once again.<br /> <br /> Pass-through entities may be entitled to all or part of a new 20&nbsp;percent deduction for qualified business income.&nbsp;The availability of this deduction depends upon the business&rsquo; annual income and the type of business in which the entity is engaged. Specified service trades or businesses can only take advantage of the full deduction if income is less than the annual threshold levels plus $50,000 ($100,000 for joint returns).&nbsp;The applicable threshold levels for 2025 are $394,600 (married filing jointly) or $197,300 (single filers) and for 2024 are $383,900 (married filing jointly) or $191,950 (single filers).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Further, when the pass-through entity&rsquo;s income exceeds the thresholds (regardless of business type), the 20&nbsp;percent deduction is capped at the greater of (1) 50&nbsp;percent of W-2 wage income or (2) the sum of 25&nbsp;percent of the W-2 wages of the business plus 2.5&nbsp;percent of the unadjusted basis, immediately after acquisition, of all &ldquo;qualified property&rdquo; (basically, depreciable business property).<br /> <br /> Additionally, state-level taxes on corporate and pass-through (individual) income should also be included in the choice of entity analysis. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the impact of the accumulated earnings tax and personal holding company tax on the choice of entity analysis. Some special considerations that can arise in the case of S corporations are discussed Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Proc. 2023-34.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Entities that are taxed under the rules governing pass-through taxation are generally entitled to a 20&nbsp;percent deduction for qualified business income (QBI, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8931">8931</a>).&nbsp;This deduction is equal to the sum of:<br /> <p style="padding-left: 40px;">(a)&nbsp; the lesser of the combined QBI amount for the tax year or an amount equal to 20&nbsp;percent of the excess of the taxpayer&rsquo;s taxable income over any net capital gain and cooperative dividends, plus</p><br /> <p style="padding-left: 40px;">(b)&nbsp; the lesser of 20&nbsp;percent of qualified cooperative dividends or taxable income (reduced by net capital gain).<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> The sum discussed above may not exceed the taxpayer&rsquo;s taxable income for the tax year (reduced by net capital gain). Further, the 20&nbsp;percent deduction with respect to qualified cooperative dividends is limited to taxable income (reduced by net capital gain).<br /> <br /> The deductible amount for each qualified trade or business is the lesser of:<br /> <p style="padding-left: 40px;">(a)&nbsp; 20&nbsp;percent of the QBI with respect to the trade or business or</p><br /> <p style="padding-left: 40px;">(b)&nbsp; the greater of (x) 50&nbsp;percent of W-2 wage income or (y) the sum of 25&nbsp;percent of the W-2 wages of the business plus 2.5&nbsp;percent of the unadjusted basis, immediately after acquisition, of all qualified property (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8931">8931</a>).<a href="#_ftn2" name="_ftnref2">²</a></p><br /> <br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong>&nbsp;The regulations (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) provide guidance on how UBIA should be calculated in the case of a like-kind exchange or involuntary conversion.&nbsp;The regulations follow the Section&nbsp;168 regulations in providing that property acquired in a like-kind exchange, or by conversion, is treated as MACRS property, so that the depreciation period is determined using the date the relinquished property was first placed into service unless an exception applies.&nbsp;The exception applies if the taxpayer elected&nbsp;<em>not</em>&nbsp;to apply&nbsp;Treasury Regulation&nbsp;&sect;&nbsp;1.168(i)-6. As a result, most property acquired in a like-kind exchange or involuntary conversion under the new rules will have two relevant placed in service dates. For calculating UBIA, the relevant date is the date the taxpayer places the property into service. For calculating its depreciable period, the relevant date is the date the taxpayer placed the original, relinquished property into service.<br /> <br /> <hr><br /> <br /> Concurrently with the proposed regulations, the IRS released Notice 2018-64, which contains a proposed revenue procedure with guidance for calculating W-2 wages for purposes of the Section 199A deduction for qualified business income. The guidance provides three methods for calculating W-2 wages, including the &ldquo;unmodified box method&rdquo;, the &ldquo;modified Box 1 method&rdquo;, and the &ldquo;tracking wages method.&rdquo; The guidance further specifies that wages calculated under these methods are only taken into account in determining the W-2 wage limitations if properly allocable to QBI under Proposed Treasury Regulation &sect; 1.199A-2(g).<br /> <br /> The unmodified box method involves taking the lesser of (1) the total of Box 1 entries for all W-2 forms or (2) the total of Box 5 entries for all W-2 forms (in either case, those that were&nbsp;filed with the SSA by the taxpayer for the year). Under the modified Box 1 method, the taxpayer subtracts from its total Box 1 entries amounts that are not wages for federal income tax withholding purposes, and then adds back the total of Box 12 entries for certain employees.&nbsp;The tracking wages method requires the taxpayer to actually track employees&rsquo; wages, and (1) total the wages subject to income tax withholding and (2) subtract the total of all Box 12 entries of certain employees. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>.<br /> <br /> If the taxable income is below the applicable threshold levels (in 2025) $394,600 (married filing jointly) or $197,300 (married filing separate returns or single filers), the deduction is simply 20 percent.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If the taxable income exceeds the relevant threshold amount, but not by more than $50,000 ($100,000 for joint returns), and the amount determined under (b), above, is less than the amount under (a), above, then the deductible amount is determined without regard to the calculation required under (b). However, the deductible amount allowed under (a) is reduced by the amount that bears the same ratio to the &ldquo;excess amount&rdquo; as (1) the amount by which taxable income exceeds the threshold amount bears to (2) $50,000 ($100,000 for joint returns).<br /> <br /> The &ldquo;excess amount&rdquo; means the excess of the amount determined under (a), above, over the amount determined under (b), above, without regard to the reduction described immediately above.<br /> <br /> &ldquo;Combined qualified business income&rdquo; for the year is the sum of the deductible amounts for each qualified trade or business of the taxpayer and 20&nbsp;percent of the taxpayer&rsquo;s qualified REIT dividends and qualified publicly traded partnership income.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Final IRS rules have clarified that REIT dividends received by RIC shareholders qualify for the 20&nbsp;percent deduction. In other words, the dividends qualify for &ldquo;conduit&rdquo; treatment and are simply treated as though they are received directly by the RIC shareholder. However, the rules don&rsquo;t provide a similar rule for PTP income&mdash;even though direct receipt of qualified PTP income would qualify the recipient for the 20&nbsp;percent QBI deduction. RIC investors may wish to take this disparity into account when determining whether to invest indirectly in a PTP.<br /> <br /> <hr><br /> <br /> Qualified REIT dividends do not include any portion of a dividend received from a REIT that is a capital gain dividend or a qualified dividend.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> &ldquo;Qualified cooperative dividends&rdquo; includes a patronage dividend, per-unit retain allocation, qualified written notice of allocation, or any similar amount that is included in gross income and received from (a) a tax-exempt benevolent life insurance association, a mutual ditch or irrigation company, cooperative telephone company, like cooperative organization or a taxable or tax-exempt cooperative that is described in section 1381(a), or (2) a taxable cooperative governed by tax rules applicable to cooperatives before the enactment of subchapter&nbsp;T of the Code in 1962.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> &ldquo;Qualified publicly traded partnership income&rdquo; means the sum of:<br /> <p style="padding-left: 40px;">(1)&nbsp; the net amount of the taxpayer&rsquo;s allocable share of each qualified item of income, gain, deduction, and loss from a publicly-traded partnership that does not elect to be taxed as a corporation (so long as the item is connected with a U.S. trade or business and is included or allowed in determining taxable income for the year and is not excepted investment-type income, also not including the taxpayer&rsquo;s reasonable compensation, guaranteed payments for services or Section&nbsp;707(a) payments for services), and</p><br /> <p style="padding-left: 40px;">(2)&nbsp; gain recognized by the taxpayer on disposing its interest in the partnership that is treated as ordinary income.<a href="#_ftn7" name="_ftnref7">⁷</a></p><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;199A(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;199A(b)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;199A(b)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;199A(b)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;199A(e)(3).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;199A(e)(4).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;199A(e)(5).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. While S corporations and partnerships are able to offer many of the same employment type benefits, such as qualified pension and profit-sharing plans and accident and health insurance, the tax treatment differs in some cases. Many of the IRC provisions that create tax preferences for employment benefits do so only for plans that provide benefits for <em>employees</em>. Partners in a partnership are generally subject to different rules. Rather than being treated as employees, 2&nbsp;percent shareholders in an S corporation are treated as partners for certain employment benefit purposes.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> For example, premiums paid for accident and health insurance paid on behalf of 2&nbsp;percent shareholders and partners are deductible by the entity, but are includable in the recipient&rsquo;s gross income.<a href="#_ftn2" name="_ftnref2">²</a>&nbsp;This is because in order for premiums paid by the employer on behalf of the recipient to be excludable from that recipient&rsquo;s income, he or she must be considered an employee. For purposes of determining the excludability of employer-provided accident and health benefits, self-employed individuals and certain shareholders owning more than 2&nbsp;percent of the stock of an S corporation are not treated as employees.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Despite this, sole proprietors, partners, and 2&nbsp;percent shareholder-employees of an S corporation may generally deduct up to 100&nbsp;percent of their health insurance premiums on their individual returns.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8787">8787</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8886">8886</a> for a discussion of the treatment of various health-related benefits provided in an employment context. Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8887">8887</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8919">8919</a> discusses the treatment of various employment &ldquo;fringe&rdquo; benefits.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;1372.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 91-26, 1991-1 CB 184.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;105(g);&nbsp;Treas. Reg. &sect;&nbsp;1.105-5(b).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;162(l).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Free transferability of interests is a factor that must be considered when a business owner is determining which business entity structure to choose. Shares in a corporation may be simpler to transfer than an interest in a partnership or a proprietorship.&nbsp;This can be attractive if, for example, an older shareholder wishes to dispose of his interest to finance his retirement, but younger members want to keep operating the business (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8992">8992</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9023">9023</a>, which address issues in business succession planning). A corporation can also be recapitalized to freeze the value of an estate and pass a family business to a younger generation. As is the case with limited liability, free transferability of interests, particularly in a closely held corporation, is not absolute.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Note that with an LLC, you can have free transferability of interests and still be treated as a partnership.&nbsp;The LLC interests can also be documented through share certificates, as with a corporation.<br /> <br /> <hr><br /> <br /> First, there may be a limited market for minority interests in a closely-held or family business, even one that is organized as a corporation. Prospective investors may simply refuse to risk being frozen out of management decisions and profits, and may be reluctant to upset the balance of personalities and interests already existing in any company. Second, it may be extremely difficult to value the shares in the business.&nbsp;Third, a sale to an inappropriate shareholder may jeopardize a business&rsquo; status as an S corporation.&nbsp;The solution to many of these problems is to restrict transferability of shares to those within a family, those approved by all other shareholders, or those who would not jeopardize the business&rsquo; S corporation election.&nbsp;These restrictions, of course, destroy the same free transferability of interests that some incorporators may find attractive.<br /> <br /> Finally, increased prestige and image may be a factor to consider. A new corporation may find it easier to attract bank financing and venture capital than a partnership or proprietorship, even if the shareholders must personally guarantee the debt.&nbsp;This advantage comes, however, at the higher price of establishing a corporation than for a partnership or proprietorship. State filing fees and attorney and accountant&rsquo;s fees all add to the cost of starting the venture. However, a corporation may amortize its organizational expenses over 60 months from the month in which the corporation begins business.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;248.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Both C corporations and S corporations may take advantage of opportunities to provide liquidity and reduce estate taxes at a shareholder&rsquo;s death.&nbsp;These techniques include:<br /> <br /> <em>Section&nbsp;303 stock redemptions</em>. IRC Section&nbsp;303, designed to provide liquidity and prevent the forced sale of businesses to pay income and estate taxes, provides that income from certain partial redemptions of stock to pay death taxes will be treated as a sale of stock rather than a dividend. Where stock included in the adjusted gross estate of a shareholder (without regard to family attribution-of-ownership rules) equals a certain&nbsp;percentage of the gross estate, the corporation can redeem from the estate a quantity of stock equal in value to the total of the deceased&rsquo;s federal estate tax, state death taxes, and funeral and administrative taxes.<br /> <br /> <em>Gifts of stock</em>. Because corporate ownership is easily divisible, shareholders can give close corporation stock to family members, charities, etc.&nbsp;These gifts can shift income to lower-bracket family members, remove future appreciation from the shareholder&rsquo;s future estate, and even provide an income tax deduction in the case of charitable gifts. S corporation shareholders must take care to insure that such gifts do not jeopardize S corporation eligibility. Unlike an S&nbsp;corporation, there are no restrictions on the ability of a trust to own interests in an LLC.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> When making gifts of stock, it is important to review any shareholders agreements which may exist in order to make sure the stock is transferable in the desired manner. It may be necessary to obtain certain consents from the corporation or other shareholders in order to complete the transfer.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Since, however, it is permissible for an S corporation to issue non-voting stock, estate planning opportunities exist whereby the non-voting stock can be transferred without relinquishing control. Also, since the transferred stock in this context is non-voting, it is entitled to an adjustment to reflect the lower value associated with this type of stock.<br /> <br /> <hr><br /> <br /> <em>Estate freeze techniques</em>. Some shareholders in closely-held corporations may reduce their eventual taxable estate by recapitalizing the corporation to &ldquo;freeze&rdquo; the value of stock included in their estates and pass future appreciation on to family members. Interests transferred in this fashion will be treated as gifts and valued according to special valuation rules (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9035">9035</a>).<br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8992">8992</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9023">9023</a> for a discussion of business succession techniques, including buy-sell agreements and redemptions that may be useful in the small business context.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> If, however, an S corporation is going to pass through an estate, consideration should be given as to whether the stock is going to pass into a trust. If so, the trust must qualify as either a QSST or ESBT.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;761(f).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For many business owners, the opportunity to limit personal liability may be the most attractive feature of the corporate form. This can be an advantage and even a necessity for a business that faces substantial liability for the actions of its agents, the hazardous nature of its business, or the liability exposure of its products. Also, any venture has an inherent risk of loss, especially in the early years. Shareholders in a corporation (as well as members of a limited liability company and limited partners in a limited partnership) are not liable for the corporation's actions beyond the amount of their capital contribution to the corporation. However, there are still important considerations that must be noted, because limited liability is not absolute.<br /> <br /> First, the corporation and its shareholders must follow strict state law requirements relating to shareholder meetings, election of a board of directors, directors' meetings, and other matters of internal governance required by the corporation's articles of incorporation and the state of incorporation's laws. These are not mere formalities—a corporation which fails to follow these rules may lose its status as a corporation and limited liability in a process known as "piercing the corporate veil." However, many states have close corporation statutes relaxing these rules and giving shareholders in a closely held corporation greater freedom to determine their own internal governance.<br /> <br /> Second, a shareholder's limited liability may be illusory for bank financing, because most lending institutions demand that stockholders personally guarantee close corporation indebtedness.<br /> <p class="PA">Finally, potential incorporators who wish to do business under an umbrella of limited liability can find other ways to do so without incorporating. One way to do so may be to set up a limited partnership with an existing corporation, S corporation or LLC as the general partner.</p><br /> <br /> </div>

<div class="Section1"><br /> <br /> A B corporation is a relatively new type of corporation that has gained popularity in recent years. A &ldquo;B&rdquo; corporation, also known as a &ldquo;benefit corporation,&rdquo; is a corporation that is formed with the express purpose of fulfilling some type of socially responsible mission that is intended to create a general public benefit. Not all states have passed legislation that makes the benefit corporation a separate legal entity that taxpayers can consider in their choice of entity analysis. Maryland, California, Hawaii, New Jersey, New York, Vermont and Virginia are among those that have passed legislation.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A B corporation is not a unique type of entity&mdash;rather; it is a corporation where the charter provides that it will be operated as a benefit corporation.&nbsp;The charter will typically provide the specific socially responsible purpose that the B corporation exists to fulfill. Essentially, the B corporation&rsquo;s officers and directors will be liable not only for operating the corporation in order to achieve a profit, but also to fulfill the specified social purpose.<br /> <br /> Although not required at formation, since a B corporation is essentially formed as a C corporation, several nonprofit groups exist to provide certification, as well as guidance and assistance in determining the public benefit structure of a B corporation. One of these, a nonprofit group called &ldquo;B Labs&rdquo; provides an assessment test that the corporation takes in order to determine its social and environmental impact and goals.<a href="#_ftn2" name="_ftnref2">²</a> Once the corporation &ldquo;passes&rdquo; this test, as long as it meets all of the legal requirements applicable to validly formed corporations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8952">8952</a>) and signs a declaration that it will operate as a B corporation, it becomes certified.<br /> <br /> Some state statutes provide for a cause of action by the B corporation, directly or through its shareholders, against a B corporation&rsquo;s officers and directors for failure to pursue the public benefit purpose that is specified in its charter.<a href="#_ftn3" name="_ftnref3">³</a> Further, state statutes require the B corporation to describe its activities relating to the specified public benefit in its annual report to shareholders. As such, a B corporation is essentially a type of C corporation that is subject to certain additional requirements, which vary by state, related to the performance of some public good.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; A B corporation group provides a state-by-state analysis of the legislative status of B corporations at <a href="https://www.upcounsel.com/b-corp-states">https://www.upcounsel.com/b-corp-states</a>. Delaware passed its legislation pertaining to B corporations July&nbsp;17, 2013.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; See &ldquo;Performance Requirements,&rdquo; available at <a href="https://www.bcorporation.net/en-us/news/blog/performance-requirements-review-update-survey-results-and-next-steps">https://www.bcorporation.net/en-us/news/blog/performance-requirements-review-update-survey-results-and-next-steps</a> (last accessed September 30, 2024).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; See, for example, Article&nbsp;1 of New Jersey legislation authorizing B corporations, available at <a href="https://law.justia.com/codes/new-jersey/2013/title-14a/section-14a-18-3/">https://law.justia.com/codes/new-jersey/2013/title-14a/section-14a-18-3/</a> (last accessed September 30, 2024).<br /> <br /> </div></div><br />