SELECT ORGANIZATIONAL OPTIONS FOR BUSINESS AND INVESTMENT PROPERTIES
BY
MICHAEL J. LOMBARDO, ESQ.


When operating a business or investing in investment property, it is important to consider the manner in which your business is to be conducted or investment property is to be held.  There are a number of options available some of which are are summarized in the table below.  There should be a further discussion with your attorney as to which organizational form is most appropriate to your situation.


Individual
General Partnership (Does Not Include LLP or Limited Partnership)
S CorporationLimited Liability
Company
Grantor Trust (Revocable)Trust (Irrevocable)
OwnershipIndividual Any person or entity. 1-100 shareholders.  Subject to limited exceptions, shareholders must be individualsMember can be any person or entity. Trust is a separate entity under the control of a GrantorTrust is a separate entity
Legal Liability of OwnersUnlimited Unlimited for General Partners. Generally limited to assets of corporation.  Assets transferred to corporation may be set aside if in defraud of creditors.Generally limited to assets of LLC.  Assets transferred to LLC may be set aside if in defraud of creditors. Grantor retains unlimited liability Limited to Trust assets. Assets transferred to trust may be set aside if in defraud of creditors.
Continuity of Entity  Limited to life of individual Various events can cause a dissolution such as the death or bankruptcy of a partner PerpetualPerpetualDepends on terms of the Trust.Depends on terms of the Trust.
Transfer of InterestSale of Asset or by will. Economic interest, if not restricted.  To a new partner, unanimous consent of all general partners. Stock transfer.  A transfer tax may have to be paid.  Economic interest, if not restricted.  If Agreement is silent, need majority of Members to consent to admit new member. A transfer tax may have to be paid.  Sale of Asset.  Trust can provide for distribution on death.Sale of Asset.  Trust can provide for distribution on death.
ControlAbsolute Governed by Partnership Agreement.  If Agreement is silent, most action is by  majority vote (some requires unanimous vote). Directors elected by Shareholders set policy. Officers manage day to day operationsGoverned by the operating agreement.Grantor retains control during the Grantor’s lifetime. Vested in Trustee(s), not Grantor.
Tax YearCalender Year  Calender Year  Generally Calendar Year  Generally Calendar YearCalendar YearCalendar Year
Tax Filing Required  Information reported on Form 1040 and related Schedules Form 1065 & IT-204, K-1s to partners. Form 1120S &
CT-3-S; K-1s to shareholders
If LLC is treated as a partnership, Form 1065 &
IT-204; K-1s to members.  Single member- Form 1040 & related Schedules. 
Tax reporting is by Grantor on Grantor’s Form 1040 & related Schedules.          
          
Form 1041 & IT-205.
Taxation of Income Directly to Owner Income is generally reported by partners (no double tax)  Income is generally reported by shareholders like a partnership (no double tax)  Income is generally reported by members like a partnership (no double tax) but could be taxed as a corp. Directly to the GrantorTaxed to trust as a separate entity at higher tax rate
Estimated Start Up CostsNone  Various depending on complexity of Partnership Agreement.  No formal partnership agreement is required.  Must file a Certificate of Conducting Business as Partners with County Clerk. Single Shareholder: $980 Single Member: $1,900 (includes estimated publication costs) Depends on complexity Depends on complexity
Ongoing Entity  Fees (There may be others depending on activity)None None.
Biennial: $9
Also, a fee of between $25 and $4,500 depending on the amount of New York source income.

Biennial: $9
Also, a fee of between $25 and $4,500 depending on the amount of New York source income.
None Statutory commissions, but these can be waived
PrivacyNone  May have to produce partnership agreement to transfer property. Generally, most corporate documents are not produced to transfer propertyGenerally, must  produce Operating Agreement to transfer  propertyRecord/produce Trust to transfer property.   A copy may have to be filed with Surrogate’s Court on deathRecord/produce Trust to transfer property.  A copy may have to be filed with Surrogate’s Court on death
Major Advantage(s)No formation & no ongoing entity fees Minimum formation and no ongoing fees if there is no formal partnership agreement. Limited liability. Ease of interest transferability, if not restricted  
Limited liability. Greater flexibility in allocating income/losses.   
Control of assets upon disability.  Disposition without probate. Limited liability. Control of assets upon disability.
Disposition without probate
Major Drawback(s)Unlimited liability.  Unlimited liability.  No free transferability of partnership interest.

Most entities do not qualify as a shareholder.  Care must be taken when using a trust for planning the estate of a shareholder having an interest in an S Corporation to be sure it is a Qualified Subchapter S Trust (QSST) or Electing Small Business Trust (ESBT). Reasonable compensation may be required (See https://www.irs.gov/uac/Wage-Compensation-for-S-Corporation-Officers)
Shareholders may be subject to Worker's Compensation Law (see New York Worker's Compensation Issues for Small Corporations)
Lender's may require loans to be processed as commercial loans even with  residential property.

More expensive to form. Transfers may be limited. All profits could be subject to self employment tax (See Chief Counsel Advice 201436049).
Lender's may require loans to be processed as commercial loans even with  residential property.
Unlimited liability.  Start up expense.  Some lenders won't  make a mortgage available.Start up expense. Loss of control.  High tax rates.

   
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CAUTION:     THIS OUTLINE IS INTENDED TO PRESENT GENERAL INFORMATION FOR EDUCATIONAL PURPOSES ONLY, IS NOT TO BE CONSTRUED AS LEGAL ADVICE, AND IS NOT A SUBSTITUTE FOR INDEPENDENT CONSULTATION WITH LEGAL COUNSEL.  CURRENT LAWS MUST BE REVIEWED WHICH MAY AFFECT THE INFORMATION PRESENTED ABOVE.  ALL FEES AND COSTS ARE SUBJECT TO CHANGE.



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Last Update: May 1, 2016