So far the NBA playoffs have been a let-down. Most games, with an exception of a few of them, have been blow-outs. I do have to say I am quite surprised that the defending champion Cavaliers have won all of their games. Yes, I know the Eastern Conference is very weak overall. However, throughout the year the Cavs’ defense was porous and was especially bad at the end of the season. I thought there was a good chance they wouldn’t make it out of the second round! Well, they “flipped the switch” and it looks like they have a clear path to meet the Warriors in the NBA finals.
Now, since I am Sixers fan, my real focus is set on Tuesday’s NBA draft lottery. The Sixers have the fourth best chance of obtaining the number one overall pick in a draft loaded with talent. Since a top pick in the draft is already set in stone, I am focusing on where the Lakers’ lottery picks falls out. Back in the “Process” days, the Sixers made a trade with Lakers where they would get their first-round pick in 2016 or 2017 if it fell outside of the top three overall. Since the Lakers had the third worst record in the league this year, I will be sitting on the edge of my seat on Tuesday night as the draft positions are announced.
If that falls through, another “Process” trade has brought some additional excitement. A trade with the Sacramento Kings brought us the possibility of switching picks this year if they have a higher pick then us. The Kings had the eight worst record in the league, so chances are slim this “switch” will happen. However, big surprises have happened in the past (see Orlando Magic in 1992 with Shaq). So while it’s possible the Kings could jump above the Sixers, the odds are stacked against it. Luckily in any scenario, the Sixers will have at least one top pick to add to Joel Embiid and the returning Ben Simmons!
Recently I have been asked by multiple potential clients the same basic question “How do I go about starting my business LLC”? This is one of my favorite all-time questions because LLCs are the “default” choice by most first time business owners. In most cases LLCs do make sense. However, other entities should be consider depending on your tax situation and future operations. So this week let’s look a the basics of the different types of business entities you can choose. Please note that the below analysis is based on current laws – things may change if and when tax reform is completed.
Limited Liability Companies (LLCs)
- The entity is a business entity considered separate from its owner and provides legal protection against personal assets. The owners are referred to as members.
- Taxes flow through to the member’s personal taxes.
- If the member is active in the operations of the business, the business income is all subject to self-employment taxes in general.
- Provides a great deal of flexibility with regards to the number and type of owners.
- Allocations of income and distributions can be specially allocated the members.
- LLCs are treated differently in different states as not all states recognized the structure.
- If you are or will be the sole member of the LLC, please see my article I wrote previously.
- Not as attractive to outside investors due to its complexities versus the corporate structure.
S Corporations
- The entity is a business entity considered separate from its owner and provides legal protection against personal assets.
- Taxes flow through to the shareholders’ personal taxes.
- Profits and distributions must be allocated in proportion to shareholder’s ownership.
- The active owners must pay themselves a “reasonable salary” since the profits are not subject to self-employment taxes.
- The entity has limitations of the number of shareholders and the type of shareholders. Only individual U.S. citizens and permanent residents can be (no, LLCs or partnerships cannot be a shareholder!). Additionally, the entity cannot have more than 100 shareholders.
- There can only be one class of stock.
- Must hold an annual meeting and record minutes of the meeting.
C Corporations
- The entity is a business entity considered separate from its owner and provides legal protection against personal assets.
- Taxes are paid at the entity level and shareholders are taxed on dividends (“Double Taxation”).
- There are no limit of the number or type of shareholders.
- The active owners must pay themselves a “reasonable salary” since the profits are not subject to self-employment taxes.
- Must hold an annual meeting and record minutes of the meeting.
- In most cases are more “marketable” to investors.
Limited Partnerships
- The entity is a business entity considered separate from its owner. The owners are referred to as partners.
- To be considered a partnership there must be a General Partner (“GP”). The GP has complete management control of the partnership.
- The partners remain personally liable for lawsuits filed against the partnership.
- Taxes flow through to the partners’ personal taxes and profits and distributions can be specially allocated.
Sole Proprietorship
- The owner remains personally liable for lawsuits filed against the business – no limited liability protection.
- Extremely simple to form as there are no governmental filings to file in general.
- Taxes are reported on the owner’s personal taxes (Schedule C).
Since the above only scratches the surface of the business entities, if you have any detailed questions about your specific situation please feel free to ask them. Lastly, before you go ahead and file any paperwork on your own please contact your business attorney. In most cases, engaging them to create the entity is the best choice so that your business structure is 100% accurate moving forward.
