Attorneys Salem Oregon | Sherman, Sherman, Johnnie & Hoyt, LLP

Attorneys Salem Oregon | Sherman, Sherman, Johnnie & Hoyt, LLP

Solving problems and enhancing opportunities since 1949

Selecting the Right Entity Type for your Business: An Overview

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Setting up a business is always a stressful process. To add to such stresses, there are numerous legal entities to choose from. You can be a sole proprietorship, a general partnership, a limited partnership, a limited liability partnership, a limited liability company, or a corporation. How do you decide? What factors should you take into consideration when deciding? There is no right answer to your decision, there are just various factors you should weigh when considering your choices.

Below is a very brief summary of some of the various forms businesses can operate under. In the coming weeks, I will go more in-depth in my analysis of each type of entity.

Sole Proprietorship — This is regarded as one of the simplest forms of conducting a business. You do not create a new legal entity and the taxation structure is simple. If you are an individual looking for something as basic as possible, this may be your choice. Though, it is important to note that if you choose to operate as a sole proprietorship, all of the debts and liabilities of such a business will fall on you personally; you will not be afforded the same type of protections that are available to other types of entities. Additionally, a sole proprietor reports all business income and losses on their personal taxes — this is called “pass-through” taxation.

General Partnership — This is very similar to the sole proprietorship above, but instead of being a single individual, a general partnership  has two or more partners and all are equally liable for any of the debts or liabilities of the business, unless otherwise agreed upon in a partnership agreement. As with a sole proprietorship, there is no limit to the liability of the partners and the profits and losses of the business pass through to the owners.

Limited Partnership — A limited partnership is a partnership consisting one or more general partners and one or more limited partners. The general partners manage the business and are liable as they would be in a general partnership. Limited partners do not participate in the management of the business, and their liability is limited to the extent of their investment in the business. Limited partnerships are also pass-through entities.

Limited Liability Partnership — A limited liability partnership (“LLP”) is a hybrid of a general partnership and a limited liability company (“LLC”). It provides, as the name suggests, certain limitations to the liability of the partners, while allowing for a flexible management structure. It is also taxed as a pass-through entity.  It should be noted that LLPs are only available to some professions, such as lawyers and accountants.

Limited Liability Company — An LLC is unincorporated entity with members, sometimes managers, and is organized under state law. An LLC has “members” who are the owners of the business. There are two types of LLCs: one is a member-managed, where the members are in charge of managing the entity, or manager-managed, which has one individual acting as the manager and operating the business. Similar to all the other entity types listed above, an LLC is taxed as a pass-through entity, where the income and losses flow through to the members in proportion to their interest in the business.

Corporation — There are numerous types of corporations, which I will go through in a future article. This entity type is a legal entity separate and distinct from its owners. The owners of a corporation are the shareholders, whose liability is limited to their investment. The actual entity is managed by a board of directors. In Oregon, a corporation must also include at least a president and a secretary as officers. A corporation’s tax structure can differ substantially from each of the above, which are pass-through entities.

In selecting an entity, individuals need substantially more information to make a decision, as there is many advantages and disadvantages to each type of entity. The above is intended only to act as a snapshot of the various options. Consulting with an attorney and/or a tax professional who can guide you in making such a decision is important to setting you up for success.

Should My Land Sale Contract or Long-Term Lease Be Recorded?

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You are buying (or selling) a home (or business property), or you are entering into a long-term (for example, 50 years, 99 years) lease of property.  On such a sale, Oregon law requires that either the land sale contract or a memorandum of the contract must be recorded within 15 days after the signing of the contract. As to long-term leases, another Oregon law permits (but does not require) the recording of the lease or a memorandum of the lease.

Parties to these sale and long-term lease agreements often opt for recording a memorandum of the sale or lease, rather than recording the entire contract or lease.  This reduces the cost of recording (counties charge by the page, and memoranda are generally shorter documents) and provides privacy protection because the memorandum contains only the names of the parties, the description of the property and the consideration (amount paid).

However, there is a significant risk involved in recording only a memorandum, rather than the full contract or lease.  Parties to contracts and leases often lose the original contract or lease that was signed by the parties. If later there is a problem, such as where the buyer or tenant stops making payments or doing other things required under the contract or lease, it is very difficult to prove just what the buyer or tenant is required to do under the contract or lease.

So as a general matter, we recommend that the original contract or lease be recorded, as opposed to recording a memorandum.

A BRIEF OVERVIEW OF THE JOBS ACT

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By now, whether you are an accountant, attorney, business owner, tax enthusiast, or simply an individual or business that files taxes, you have heard of the tax reform signed into law by President Trump on December 22, 2017 — better known as the “Tax Cuts and Jobs Act.” Depending on who you talk to, the Jobs Act is great or it is a disaster. Regardless of the perspective, it is a change in laws that impact us all and being aware of the changes that come with it is important. It is worth noting that this is the largest and most significant change to the United States Tax Code since 1986.

On an individual level, the Jobs Act modifies the tax brackets for individuals, while preserving the seven-bracket regime. The highest bracket is now 37%, down from 39.6%. While at first glimpse this is a positive change for individuals, the Jobs Act also made substantial changes to available deductions and exemptions. For example, the Jobs Act nearly doubles the standard deduction and child tax credit, while itemized deductions are reduced up to 80% for taxpayers with income meeting a certain inflation-adjusted threshold.

For businesses, taxes often play a large role in determining how to structure the business — will it be an LLC, an S-Corporation, a C-Corporation, or otherwise? Initially, as understanding of the tax bill increases, many may prefer forming as a corporation. This is directly correlated with the fact that the corporate income tax rate has been reduced down to a flat rate 21%. Additionally, while the law previously allowed corporations to claim a deduction for dividends received, the Jobs Act reduces the deduction to reflect the lower flat tax.

Smaller businesses, who often do not take the structure of a corporation, are typically pass-through entities. This includes sole proprietorships, partnerships, LLCs, and S-Corporations. To be a pass-through entity means the entity is not subject to income tax. Rather, the owners are directly taxed individually on their income. This means that the pass-through entities pay higher than the 21% rate for C-Corporations. To make up for this disparate treatment of entities, pass-through entities are afforded a new deduction of up to 20% of their net business income. This is a deduction in addition to other available business deductions.

Determining how to structure a business, how to hold income, or how to pay shareholder-employees requires understanding the tax implications. Without a sufficient understanding, individuals and businesses may not be appropriately minimizing their tax liabilities. It will be important to reach out and seek assistance to save yourself from increasing your tax liabilities or missing out on available methods of saving.

Buyer Beware: The Not So Great Deal of a Tax Foreclosure Sale

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Counties across Oregon are required to begin foreclosure proceedings if the oldest unpaid tax year is three or more years delinquent.  Following foreclosure, there is a two year redemption period during which certain interested parties may bring the account current.  At the end of the two years, if not brought current, the property is deeded to the county and the county may sell the property.

Be careful though, that great deal on a property at a tax foreclosure sale may not be such a great deal after all.  The property is sold “as is” and you will most likely not be able to inspect the property prior to the sale.  What looks good from the outside may not be as easy on the eyes, or wallet, once you get inside.

And once you actually get the deed to the property, do not count on getting title insurance.  Due to perceived conflicts between Oregon statutes and U.S. Constitutional rights, Title companies are reluctant to insure title to properties purchased at tax foreclosure sales for five or even 10 years or more after being purchased at a tax foreclosure sale.  Some title companies even require that the tax deed holder undertake a quiet title action to eliminate the interests of all former owners and lienholders.

So, before you go out and find a steal of a deal at a tax foreclosure sale, do your research to ensure you know exactly what you may be getting yourself into.

Keep Your Estate Plan Up To Date

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TO DO LIST:

  • Oil Change
  • Dentist Appointment
  • Take Fido for checkup

Whether we think about it or not, most of us work off mental checklists to help us take care of those things in our lives that need occasional attention.  Here’s one thing you should add to your checklist: Review and update your estate plan.

If you don’t have an estate plan (a will or a trust), maybe it’s time to put one together.  If you do have an estate plan, that’s great, but you can’t afford to rest on your laurels.  It’s important to review your plan every few years and update when necessary.

We recently talked to a client who is the surviving spouse of a couple who created a joint trust as their estate plan in the late ‘90’s.  At that time, their total estate was worth less than the amount they could leave to their children without incurring inheritance tax.

Twenty years later, one spouse is deceased, and the value of the estate assets has nearly doubled.  Under current Oregon law, the surviving spouse can only leave $1 million in assets to her children tax-free.  Assets above that level will be subject to Oregon estate tax. The problem is that while the value of the client’s assets has gone up significantly, the Oregon exemption has only increased $50,000, from $950,000 to $1 million.

Had the client and her husband reviewed and updated their trust at regular intervals (say, every 3 – 5 years), they could have taken steps to eliminate the potential liability for Oregon estate taxes.  But now that one spouse is deceased, the opportunity to avoid such taxes is substantially diminished.

So put this new item on your checklist of things to do every so often.  It could pay rich dividends for you and your family.