1. Introduction

In the second section of this chapter, issues on business entity structure are reviewed briefly, particularly in connection with the recent federal tax law changes, such as how pass-through businesses are taxed, and the tax law’s Qualified Business Income deduction. Wuebker presents a limited survey of pass-through business entity usage and corporate tax structure, specifically involving risk takers, risk averters, and businesses involved with agricultural production. Govindaraj and Wuebker investigate business entity choice and financial literacy education issues, also in connection with agriculture production.

This chapter presents a detailed overview of the six legal business entity types that can be chosen by business owners in Texas, as well as how they are taxed, including their administrative costs. Business entity structure decisions are shown to depend on the business owner’s risk preference, expected business revenue per year, and expected business profit margin. It is shown that for sole owners of Texas businesses with revenues less than $100,000 per year, sole proprietorship is the dominant decision. For Texas businesses with between $100,000-$200,000 in revenue, formalized risk preferring businesses (FRPBs) account for 30% of the business owner population. For Texas businesses with revenues over $200,000 per year, a Limited Partnership (LP) is the dominant decision.

1.1 Overview of different business structures

C corporations pay corporate taxes. The net income of the corporation is realized at the corporate tax rate. Resulting from income distributions, C corporations risk facing double taxation. In contrast to partnerships and LLCs, a C corporation is taxed for dividends given to stockholders. Net income is again being taxed at the dividend tax rate when corporate gains are distributed to shareholders. C corporations may opt to be taxed similarly to flow-through organizations under a provision in the Tax Cuts and Jobs Act, which was approved in December 2017. The Act permanently reduced the corporate tax rate to 21 percent and provided certain benefits to shareholders, including the ability to pay dividends on profits without double taxation, and allowed the ability to reduce the corporate rate to the shareholder tax rate. However, the Act also introduced new international tax avoidance provisions, ostensibly to level the competitive field with international businesses in the United States.

Sole proprietorships and general partnerships, sometimes known as flow-through business entities, are known as pass-through tax entities and do not file separate tax returns as the owners are responsible for the taxes. Rather, the income, gain, loss, and deduction of the entity pass through the business to the owners. The owners file forms for individuals, estates, or trusts, which itemize their share on their own tax returns. Limited partnerships and limited liability companies may also be treated as flow-through entities. The net income of flow-through entities is realized through a transfer of certain property and may induce self-employment taxes. The passive income of flow-through entities is subject to the net investment income tax unless the taxpayer has an active role in an active business. According to the IRS, income from an active business under IRS criteria is defined as (1) a trade or business in which the taxpayer works on a regular, continuous, and substantial basis, or (2) the trade or business is providing property to customers, and the business activity of providing the property is a principal means for earning income.

In Texas, business entities generally operate under one of the following categories: sole proprietorships, general partnerships, limited partnerships, professional associations, limited liability companies, or corporations. For tax purposes, Texas does not have a specific entity called a corporation; a corporation will either be taxed as a C corporation or an S corporation. Under the tax code, the tax implications of an entity’s choice depend on the entity type.

1.2 Importance of understanding tax implications

Not only does advice in this area come with a fee, getting competent advice in this area can be quite challenging, requiring talking to different professionals with different skills and experiences. Also, one individual such as an accountant does not have all the specialized knowledge for advising clients in this area since tax implications of business entities can hinge on many things including legal framework and tax legislations and rulings. So, if any advice provided comes with a fee and requires some level of technical and specialized knowledge, because of this, many entrepreneurs with little or no capital and financial resources do not have access to professional or technical advice in choosing the best business entity structures with respect to tax implications; possibly choosing the inappropriate entity that puts them at an income tax disadvantage over time. This may also subject the entrepreneurs of small businesses to unnecessary tax burdens and pressures – a financial penalty for not engaging professional assistance often that could be quite easy to avoid.

When setting up a business in Texas, which business entity structure should an entrepreneur use? When setting up a business entity in Texas, business owners have many business entities to choose from including the C-corporation (“C-corp”), S-corporation (“S-corp”), limited liability company (“LLC”), partnership, sole proprietorship, the general corporation (“PC”) the general partnership (“GP”), the trust and other entities. How do Texas business entities differ with respect to tax implications? The topic of tax implications of business entities is important. One reason for this is that entrepreneurs have many business entities to choose from in Texas. The choice of business entities should be made wisely since it cannot be easily changed. Another reason that makes the topic of tax implications important is that this area is quite technical, complex and specialized. Consultants and advisors including lawyers, accountants and tax preparers often charge fees for advice in this area.

2. Business Structure Options in Texas

Sole proprietorship is the default business entity for persons who are not doing business in their legal name. If Jane Denton opens Jane’s Music Shop and operates the business by herself, she is doing business in a name other than the name on her birth certificate and must register the assumed name with the county clerk.

For Texas businesses that do commercial transactions under a name different from what is listed on the organizing documents, the name is required to be registered with the Secretary of State as an assumed name. For example, ABC Partnership’s organizers file establishing documents and the entity’s legal name with the Secretary of State. ABC then opens a business bank account under the name ABC Financial Consultants. That assumed name is registered with the Secretary of State in the county clerk where Lion operates its business.

In Texas, the most common forms of business fall into these general categories: (1) Sole proprietorships, (2) Partnerships, (3) Corporations, (4) Limited liability companies, (5) Trusts, and (6) Condominium Associations. This article provides an introduction to several options in the first three categories.

To start, each of the general classifications has lots of different types of business entities available in Texas. This discussion focuses on the general categories, followed by descriptions of specific entity options. However, it does not include all of the entities in a category. After pairs of categories and examples, the second part of the article will address tax implications of the different types of entities.

2.1 Sole proprietorship

There are additional IRS tax implications to a sole proprietorship. The money that a sole proprietor earns in the business is taxed as individual income to the owner so any profits from the business are added to other personal income and then taxed. This type of taxation is called “pass-through taxation”. Additionally, promoting a new business as a sole proprietorship may cause potential clients or customers to overlook the concern – a customer may feel more comfortable doing business with the owner of an entity that is more formal or established. If the owner’s intent is for the business to grow and possibly begin employing others, a sole proprietorship may not be the most appropriate entity to meet the owner’s goals as the structure is very simple and does not provide options to obtain capital directly through the business or provide for multiple owners or employees.

A sole proprietorship is the most simple form of business entity. It is not legally separate from the person who owns it. There are few legal requirements to setting up a sole proprietorship and there is no required documentation to be filed with the government. A sole proprietorship is not required to use a separate employer identification number (EIN) and may use the social security number of the individual owner. Because its form is so loose, a sole proprietorship has its advantages – the person who owns the business brings in the income directly and may take any required or optional management decisions easily. The main disadvantage of using a sole proprietorship is that there is no separation between the business finances and personal finances of the owner – so if the business does not do well, creditors of the business may look to the owner personally to satisfy business debts.

2.2 Limited Liability Company (LLC)

The federal tax treatment of the LLC is unusual in that the IRS has decided to allow the members of the LLC (those who own the membership shares in the LLC) to determine how the LLC will be treated from a federal tax perspective. An LLC may have but one member or may have multiple members. By electing to change the default tax treatment, the members can cause the LLC to be treated as a corporation, an S Corporation, a partnership, or simply as a sole proprietorship for federal income tax purposes. An LLC is considered a partnership under the default IRS rules, allowing the owners to be taxed individually on their respective share of the LLC’s profits and losses similar to a partnership with substantial asset protection for the owners. Rotation or change of status can be affected quite simply by filing typical tax forms, with occasional limitations as determined by IRS regulations. The LLC is considered a separate entity from its owners and is designed to mimic corporate structures while providing the pass-through flexibility that individuals desire when organizing a business.

The limited liability company, or LLC, is a newer form of business entity that has become popular in recent years for organizing small- to medium-sized businesses. An LLC is separate and distinct from its owners and from its managers, who operate and manage the LLC similarly to how shareholders own and corporate directors manage a traditional corporation. This creates powerful asset protection for the owner-managers, is simple to operate and allows for a great amount of flexibility while still maintaining separate and secure liability to the business itself and providing pass-through tax treatment. The general operating agreement of an LLC can outline, with extraordinary flexibility, how the LLC will be operated and allow for the distribution of profits, voting on management and other important items for the running of the business.

2.3 Corporation

A corporation is owned through the issuance of stocks. The ownership shares are represented by certificates. A corporation has centralized control, as will be explained in detail later in Chapter 8: Corporate Officers, Directors, and Shareholders. The owners of the corporation are exempted from personal liabilities for corporate responsibilities and debts because the business separates the affairs of the business from the affairs of the owners. That is the fundamental reason for choosing the corporate form of a business. The state of Texas also recognizes the reasonableness of that limitation on shareholder liabilities because Texas law also exempts the corporate shareholders from personal liabilities for the corporate debts. An alternative and more flexible form of a general corporation may be a C corporation as constituted under the Internal Revenue Code. In any case, the corporation is created by filing articles of incorporation with the Secretary of State and paying the required fees. Thus, the state would register the corporation. Even though filing might be done by the attorney or an authorized agent, there are certain documents that must be filed with the Secretary of State along with the Texas Charter and required fees. A corporation is an entity that takes on a legal personality and enjoys the same rights and responsibilities as an individual; a corporation can own property, incur liabilities, and enter into contracts.

A corporation, even a one-man corporation, is an entity with a legal existence of its own. The corporation can enter into agreements and do such activities as the law permits, such as sue and be sued, buy and sell property, and sign contracts. That is why the corporation is known as a separate legal entity. As a separate legal entity, the corporation’s shareholders might not be personally responsible for the corporate obligations or debts, unless otherwise agreed in writing.

3. Tax Implications of Each Business Structure

In a limited liability company and partnership structures, income and business tax liabilities are usually passed to your personal tax return, where you pay personal tax rates. In exchange, you get the advantage of first dollar losses, potential tax credits, and tax write-offs. Considerations, potentially complex, are traditionally based on the tax implications that distinguish corporation structures from partnership and LLC structures. The corporation structure is appealing to start-up businesses that expect large revenues and require extensive means to finance vehicles. The S corporation seems like a hybrid having limited liability and pass-through operational tax implications.

A business lawyer typically highlights three main distinctions that can be drawn between the various business structures. Each has a unique taxation effect. Owners should consider these parameters when picking an entity type. This would include partnerships, including a limited liability company. Generally considered, corporation profit is taxed twice. This is under the federal tax and state tax. Taxation is first made at the corporation level. Shareholders are then taxed on dividends distributed to them. Dividends are paid out of taxed corporation profits.

3.1 Sole proprietorship tax considerations

The tax implications of a sole proprietorship are straightforward: the income and expenses of a sole proprietorship are reported on the Schedule C, and the net number is transferred to the personal tax return of the business’s proprietor. Schedule C, Profit or Loss from Business, contains six parts, including a brief instruction for each part. If any of the following situations apply to you, you would need to file this Schedule C: you were self-employed as a sole proprietor, an independent contractor, a member of a partnership, or in any other business. You had foreign earned income. You have a qualified joint venture. Because the net business income from the sole proprietorship is passed through to the proprietor and reported on the owner’s personal tax return, and because we previously determined that Texas does not impose a personal income tax, the sole proprietorship structure is the only business entity that essentially neutralizes the business tax implications when the proprietor is resident in Texas. As contrasted to the corporations, some of the business tax implications are: the possibility of retaining earnings within the business at a significantly lower tax rate than personal enhancements, the possibility of individual health coverage and retirement plans to avoid double taxation of driver benefits, the possibility of a custom-structured investment account for investing corporate spare cash created by corporate OPE-I benefits, tax-favored employee remuneration versus restitution, and the potential for a tax-efficient handover of ownership (estate planning).

3.2 LLC tax advantages and disadvantages

LLCs and partnerships, for tax purposes, are “flow-through” entities, meaning that the income is not taxed directly to the entity itself. Instead, the income “flows through” to the owners, who report it on their personal income tax forms. While an association can choose to be taxed as a corporation and then elect S corporation status by filing Form 2553, some business owners initially operate as an LLC and carefully evaluate the advantages and disadvantages of LLCs and S corporations before deciding whether to convert to an S corporation. Understanding the tax advantages and disadvantages of an LLC is complex and extends beyond just the self-employment tax. Specifically, because partnership and LLC income, after considering the Net Investment Income Tax, and S corporation salaries with employment taxes, are usually taxed at the same rate, the benefit of saving on self-employment tax by avoiding the need for distributions (when LLCs operate as S corporations) does not apply to S corporation shareholder distributions (i.e., salaries, profits, and losses).

Three major benefits of forming an LLC compared to a partnership or sole proprietorship are: (1) protection from personal liability for business debts; (2) fewer formalities and paperwork required for operation; and (3) more flexibility to structure the LLC as desired, including tax classification. Protection from personal liability for business debts is a strong advantage, but it only applies if the LLC is operated properly as a separate entity. The reduced formalities can attract business owners who want to focus on their business rather than administrative tasks. While partnerships and sole proprietorships also offer flexibility in structuring the business, LLCs provide more options, especially in terms of tax classification. Although these perceived advantages may lead many entrepreneurs to prefer organizing their business as an LLC, the tax disadvantages of LLCs may discourage others from doing so. The tax implications of forming an LLC are complex and can result in either tax advantages or disadvantages for business owners.

3.3 Tax implications for corporations

In addition to the business franchise tax, an LLC or corporation must file an annual Franchise Tax Public Information Report. Subchapter S corporations are considered tax entities but not taxable entities. Subchapter S corporations are not subject to federal taxes. Instead, income and losses “pass through” to the shareholders of the corporation. The shareholders then report their pro rata share of the corporation’s income and losses on their respective personal income tax returns. Shareholders also must report their pro rata share of any credits and deductions the corporation provides. Similarly, Texas does not impose a business franchise tax on an S corporation.

Subchapter C corporations, like LLCs, are taxed as separate entities. The federal tax rate for C corporations is 35% (there are federal credits and deductions that could reduce this federal rate). The Texas business franchise tax is 1% of a C corporation’s taxable margin for most businesses or 0.575% for retail and wholesale businesses. To illustrate, let’s calculate the business franchise tax for ABC Company, a C corporation. ABC Company has $1,000,000 in gross receipts, $600,000 cost of goods sold, $300,000 other deductions, and $400,000 compensation. In this case, the taxable margin is $500,000 (gross receipts ($1,000,000) – cost of goods sold ($600,000) – other deductions ($300,000)). The business franchise tax for ABC Company is $5,000 (taxable margin ($500,000) x 0.01).

4. Factors to Consider when Choosing a Business Structure

When first starting a business, it is important to remember that all of the profits (and sometimes other revenue) the business generates are taxable income. What the form of business does is change the income subject to tax from being your own to belonging instead to a separate legal entity. Thus, the immediate financial condition of your business (or your family budget if the results of the business activity belong to you personally) essentially can remain the same, for tax purposes, under any of the following entities: a sole proprietorship, an LLC whose profits are passed through to an individual or group of individuals, an S corporation, or a partnership. However, of the last two, I would generally recommend the S corporation, as you will avoid contributing to the full 15.3% Self Employment (SE) tax.

Family Budget Consequences for Revenue & Profits

One of the more important aspects of business formation and ongoing structuring is the tax treatment your business entity will provide. As a business owner, your overall financial return on investment means what you get from the business after paying (whether personally or by making company distributions) the cost of obtaining goods and services, which in turn requires consideration of the tax rates applied to what is left after paying those costs. While the laws addressing each type of income tax vary from state to state, there are several things to consider.

Income Taxes

Next, assuming a higher level of need for asset protection, the business might be structured under state laws as a partnership, limited liability company (LLC), or corporation. In these forms, owners have some level of initial and/or ongoing financial contribution, but neither they nor the entity itself is generally held to be responsible for conduct of the other(s). There are time and financial costs of maintaining these limits, however. For example, companies are required to maintain records and operate the business as separate legal entities, plus ongoing costs associated with their capitalization methods, reports to be submitted to the state or IRS, or audited financial statements. A skilled party can help you achieve good asset protection without it costing too much, though. The best advice, therefore, is never to let financial limitations dictate your business structuring process by causing you to ignore what types of conduct could generate liability business risks. It’s essential to ensure that you always enforce the unique entity protection limits in all ongoing business activities.

Under state laws, a business is legally defined as a thing that can enter into contracts and engage in different types of civil conduct. There are three main ways potential business liability risks are typically addressed in the formation of a business entity. First, when you are starting a new business and don’t yet have much to lose legally or financially, the business is often set up as a sole proprietorship to keep formation and ongoing administrative costs down. Under that form of ownership, the business income, along with any expenses and losses, will be listed on your personal tax return. However, because as a sole proprietor you are the owner of all assets at risk in the business, all of those assets can be subject to settlement if anyone ever had a liability claim against the business.

Liability

There’s no one-size-fits-all answer to choosing a legal structure for your business. Each business is different, and all are affected by different combinations of factors. When choosing a structure, you’ll want to consider a variety of things, including the objectives you’ve set for your business, your pecuniary issues, and how much of the business’s income you’d like to have taxed on its own versus having it taxed on your personal return. Also important to consider in making the choice are issues of liability, capitalization, how to later sell or pass the business along, plus issues of formation and administrative costs and ongoing procedural implementations.

Decision Factors

1) Texas Small Business Handbook – Ch 4 – p 25 Chapter 4: Factors to Consider when Choosing a Business Structure

4.1 Liability considerations

One of the earliest protections which can be provided by a legal entity is from employees of an entity and also from other parties who are involved with an entity either in furtherance of a contractual obligation they have with the entity or through casual conduct. The following examples are cases where entities can provide liability protection. An incorporated entity known as a corporation can provide liability protection to its incorporators, its owners known as shareholders, its directors, its officers and its employees from matters which arise through conduct of the corporation. A foreign or a domestic limited partnership can provide protection against liability from actions of either of general partners who are also acting through authority which the entity has given to them as decision makers on important aspects of the partnership’s operations.

If setting up a legal entity for doing business in Texas, it is very important to consider how different business entity structures offer protection from potential liabilities. The consideration is especially relevant when individuals own the business directly without any layers of ownership being interposed between the owner-managers of the business and the public which the business serves. If something goes wrong with the business or within the business with an entity present, perhaps the worst outcome that can result is the end of the business. If such a result occurs with no entity present, there can be great personal loss to people involved with the business. The following is a review of how six legally legitimate business entities can protect the assets of one or more owner-managers from certain liabilities which can result from operations of the relevant entity.

4.2 Tax benefits and advantages

The advantages of the pass-through tax status of partnerships and other unincorporated business entities are well recognized by the business sector. These entities avoid the classic corporate double-taxation of income, first at the entity level under the formal provisions of Subchapter C of the Internal Revenue Code and a second tax at the individual shareholder level under Subchapter A. Individual and corporate taxpayers as partners, members, and shareholders accordingly have regarded unincorporated business entities as a quick fix for the problems associated with double taxation that is the corporate curse of a pass through under Subchapter S. Accurate or not, many people say that even when the kitchen sink “applies” to corporate entities, the economy remains dynamic as the shareholder-owners are fully aware of what happens in their corporations and are able to report events as they actually happened since they can set the prices of goods to put ‘food on the table’ and taxes in the government coffers.

Such business structures provide many tax benefits; for instance, they avoid the problem of double taxation of the corporation (i.e., the corporation’s profits are taxed when earned and again when distributed to its shareholders) while providing liability protection from the creditors of the business. Other benefits include support of a fractional interest discount for estate planning purposes, substantial valuation discounts for lack of control and marketability, fine-tuned control allocation, and a clear definition of the role of the various stakeholders in the business. The choice of entity requires a sophisticated evaluation of numerous forms of benefits derived from choosing an appropriate business structure. While tax benefits are the primary driver for these entities, they must also be in compliance with state law and meet accounting and cash flow requirements, so a balance must be reached between these often conflicting positions.

4.3 Ownership and management considerations

Corps: Creation is simply a filing with the Texas Secretary of State. Officers are usually elected by the board of directors. Directors are elected by the shareholders. Note that the same individual can effectively serve as an owner (shareholder/member), an officer, and a director. For example, as the single member responsible for all the activities of the SMLLC. And that makes, for many small business projects, these entities very easy to create and use. However, corps also place where they come in useful (professionally) and likely how they save money because of years of court cases and tax law interpreting the rules that govern them – since hundreds of years have passed.

Owners/Members: Stock here generally means shares in a corporation (Corps) and a partnership or limited liability company (LLC) interest among the members. Stock (corporations), interests (partnerships & LLCs) can be bought and sold, they can be gifts, or what is typical in more complicated corporate structures, they can be transferred via a non-recognition event (this typically means in a tax-free exchange). The number of shares issued or the number of units allocated can vary. For example, a single member LLC (SMLLC) can issue 1 membership interest to its holder (member). A corporation can issue as few as 1 share. Some corps will likely have similar articles or operational agreements to spell out the details such as voting rights, special allocations, rights of first refusal, etc.

4.4 Flexibility and scalability of the structure

In sum, there are significant untaxed assets that the owners can use to further operational objectives, uniquely shielded by the LLC statutory scheme. This flexibility and the ability to draft/revise an operating agreement that is tailored to meet the unique needs of the business may be the determining factor in why business owners should prefer an LLC structure over more traditional entities (i.e., C Corporation or Partnership).

The flexibility and scalability of an LLC is one of its most attractive features. This flexibility allows the LLC structure to accommodate a myriad of different relationships among its members: co-owners, investors, managers, employees, and other stakeholders can all be accommodated under LLC law. The operating agreement is the key document that enables this flexibility by granting or restricting a manager’s authority to act on behalf of the company, by describing the rights granted to each member, and describing the hierarchy of compliance by which the LLC and its members and managers pursue their business objectives. The corporate model does not allow for this degree of flexibility. Flexibility also enables the company to adapt to changes in circumstances, such as an infusion of venture capital, securing a significant debt financing or the participation of new members or additional investors, often in a private placement. The operating agreement and the LLC statute permit the rights and privileges of the participants to be manipulated almost “on the fly” and oftentimes without the formalities of a written amendment or unwieldy requirements for unanimous approval by all members.

5. How a CPA Can Help in Selecting the Most Tax-Advantageous Structure

#1. A CPA can provide open, honest advice and help you think through different ‘what-if’ scenarios that can arise in your business. A CPA can help it all come together. Finally, let’s review how a CPA can help you when you’ve already formed your business entity but are unsure how that decision will impact your tax and operational capabilities.

#2. A CPA’s firm can be a registered agent in Texas. I have many prospects call me after they have talked to other “business formation professionals,” and report the high-pressure tactic that a new entity owner must select who will be their company’s registered agent QUICKLY before THEY, NOT THE COMPANY, MISS OUT ON $$$$$$S! NOT TRUE! There are many registered agents in Texas (including many CPA firms) who would be proud to be the registered agent for your Texas business. Interview them and select the best fit for your business; don’t let someone pressure you—THIS CAN BE A TRUSTED PARTNER who can help your business SOAR! The decision about who will be the registered agent for your business should be a priority, and forming an entity without designating a registered agent is not allowed, and any company that attempts to do this is showing that they are willing to cut corners on their client’s work at the company’s future legal and operations peril. A good, professional CPA may be able to be a registered agent for your Texas business. However, there is no requirement from the IRS that you must use a CPA as your registered agent. After formation, a good CPA’s strong relationship with their client often positions them well to become a valuable Seeker of Solutions to business issues, including the brilliant tax guidance that has sustained businesses in Texas since its inception so many years ago, but hiring a CPA for your business’s professional services doesn’t mean the CPA will also be your registered agent. If your CPA can do it ethically and is qualified for the engagement, then it can be a bonus to have them as your registered agent. Because an entity owner isn’t required by law to have a CPA as their registered agent, doesn’t mean they shouldn’t. Instead, use the REG SEASONS ACPIS method to evaluate if your CPA should be hired as the registered agent for your entity during your business planning process, BEFORE your formation process.

#3. A CPA can highlight and explain third-party liability protection offerings. In addition to limited liability protection for owners offered by most entity structures, a CPA can help you identify third-party liability issues related to your specific operation and the industries that can be at the highest risk for legal claims. A CPA can advise you on how to mitigate your exposure by leveraging the third-party liability protection benefit that different entity structures offer.

#4. A CPA can research available names for you until the right one is found and provide you with best practices for your articles of formation. Each state’s Secretary of State has different rules about business names, and a CPA is aware of the rules and knows how to register your name to avoid trademark or other legal problems in the jurisdiction you are concerned about.

#5. A CPA can advise on the most tax-advantageous structure for your unique situation. A CPA can analyze and explain the tax implications and help you consider your longer-term business strategies.

Top 5 reasons to hire a CPA to form your business include:

5.1 Expert guidance on tax implications

Therefore, in order to provide reasonable tax advice when structuring a Texas business, attorneys should constantly check the law and be conscious of the recent changes to the tax law. For example, through 100% bonus depreciation, the cost recovery of certain qualified property, now particularly qualified property that is primarily used in Texas subsequent to its acquisition, has completely changed under the Tax Cuts and Jobs Act. Something that a Texas state bar attorney, providing mostly transactional work, needs to consider is if his or her client has production expenditures as part of that qualified property and brings this to the client’s attention as an adviser.

Given the vast array of Texas business entity structures that offer certain tax advantages – tax-free formation, deferral of gains, and tax-free distributions, just to name a few – it is crucial to consider the specific characteristics of each business entity before making such a huge decision. When making this decision, before consulting with advisors such as certified public accountants (CPAs), the assistance of a tax law expert may help individuals effectively pick a Texas entity. The business entities, such as a C corporation, S corporation, general partnership, limited partnership, or limited liability corporation (LLC) available under Texas law, usually chosen when structuring a small business, have other tax implications. Boost your competence about business tax law to better advise your clients by taking the necessary steps recommended by the State Bar. To assist Texas State Bar attorneys in keeping abreast of the ever-changing tax law, the Texas State Bar has a tax section which organizes seminars and conferences focusing on tax developments.

5.2 Evaluation of individual business needs

The first issue, that of subjective evaluation, typically revolves around the participant’s comfort zone, particularly in the case of multiple participants whose ownership is disproportionate. If, for example, the participants are comfortable with a corporation, regardless of tax structure, that documentation can be prepared and in place. Once it is agreed what form of entity will be utilized, the business tax structure can usually be modified without having to change the form of entity. On the other hand, individuals who are interested in flow-through tax treatment, with fewer dividend date issues, typically prefer that business operations be conducted as a partnership. The option or opportunity to elect entity tax treatment as a partnership occurs with almost all business entities, even corporations. In short, since most business options are taxed as partnerships, choosing a flow-through tax structure is the exception, not the rule. This issue is primarily a subjective, and not objective, determination.

Different forms of business entities offer different structuring opportunities and results. In order to appropriately evaluate individual business needs, an analysis must be performed which, as a threshold issue, addresses both objective and subjective criteria.

When contemplating commencement of a business enterprise, the participants need to balance their individual and collective needs within the context of the business entity available. Among other considerations, the potential for flow-through tax treatment, limited liability for one or more participants, self-employment tax liability, and the type or timing of federal income tax liability are important.

5.3 Assistance in structuring for maximum tax benefits

It is important to understand that for tax purposes with respect to any income that is obtained from a legal entity, the Internal Revenue Service is going to flow that income down, regardless of the entity structure, down to the individual tax returns with the owners. Accordingly, if it’s in an S corporation, the monies will flow through as such on the individual tax return of the partners as if the individual owned, had those business entities in and of itself; which is a significant tax benefit. Not only are we looking for that benefit at the federal level, we also look for the benefits at the New York state tax and local tax in New Jersey, New York City, Buffalo, etc. where we want more tax planning; saving it such that the individual owner is taxed a minimum alternate tax as opposed to not having any benefits at all.

I often get asked, “Ibrahim CPA, as a CPA, are you capable of structuring a business entity? I thought only attorneys did that.” The answer is yes. How the entity is structured from a tax benefit standpoint, however, we work with your legal counsel to determine which entity type will best protect you. Sometimes legal’s decision is not what’s in the best interest of the client’s tax benefits. This is why it is very important to have a legal team in place, such as HoganWillig, before you begin structuring your entity. The real estate is put in an LLC or an LLP or an S corporation. Remodeling the home, renovating it, fixing it up, buying it, selling it and leasing it, is structured in such a way to provide some tax benefits that you would not have under a C corporation. The tax planning enables you to keep those folks in minimum taxation.