Starting Your Outdoor Recreation Business: Entities and Taxation

Entities and Taxation

Choosing and Creating the Right Entity for Your Business

Starting any business now days you should create an entity, corporation, limited liability company, partnership, joint venture or trust to run the business. This helps your accounting, provides you greater tax options and protects your personal assets from a creditor. A creditor can mean someone you owe money to or an injured guest who is suing you.

Protecting your personal assets is probably the most important item on the list followed closely by how you want any profits taxed to you and/or to the entity.

The type of entity you want to create is different in many cases from the way it is to be taxed. The most confusing is Corporations, and Limited Liability Companies taxed as a Sub-S corporation. Everyone always speaks of a Sub-S Corp or S-Corp. However, no such thing exists. If you go to any Secretary of State’s website to create your new entity, you will not see Sub-S listed as an option.

Sub-S is not a type of entity. Sub-S is a way an entity is taxed. You hear people say they have a Sub-S corporation they are referring to the way their entity is taxed not the type of entity. There is no such thing as a Sub-S corporation. There are corporations and limited liability companies that are taxed as under 26 U.S. Code Chapter 1, Subchapter S of the Internal Revenue Code.

If you listen solely to your CPA, if they are not up to date, they will create a regular corporation or (C-Corp) and file it with the IRS as a Sub-S for tax purposes creating liability nightmares for you later. (That is the first reason why you should not have a CPA providing legal advice, besides it is illegal.) Besides, the IRS issued a ruling almost a decade ago that allows a Limited Liability Company (LLC) to be taxed as a Sub-S corp.

Below are various charts to help you understand what entity can do, how much work and cost are involved, how much protection and how that entity can be taxed.

Entity Name

Ways it can be taxed

Restrictions

Rating
1-10

Corporation Corporation

5

Sub-S Must file with IRS & meet restrictions Filing must be done within 60 days of creation. Once filed it is difficult to undo. Sub-S also has restrictions on ownership.

5

Non-Profit Corporation Non Profit Corporation Requires IRS application to receive non-profit status 8
Partnership Partnership 1
Limited Liability Company Sole Proprietor Must be indicated on EIN & LLC documents 10
Partnership Must be indicated on EIN & LLC documents 2
Corporation Must be indicated on EIN & LLC documents 8
Sub-S Must file with IRS & meet restrictions. (See Above) 10
Limited Partnership Partnership 6
Limited Liability Limited Partnership (FLP) Partnership Expensive and a lot of paperwork each year, however the most effective entity to protect assets 10
Entities not created by Application to the State (most states)
(Therefore taxed as one of the entities above)
Joint Venture Determined by the taxation of the parties to the Joint Venture a contractual joint venture

a joint venture partnership

a joint venture company

3
Cooperative Created by Contract 2
Unincorporated Association Recognized in Some states 1
Business Trust Usually taxed as a Corporation, sometimes as a trust 5
Business Association Can be taxed as a partnership or a non-profit organization 4

Another big issue is the difficulty in keeping the entity current, the paperwork updated and to make sure you have the required meetings.

Entity Name

Amount of Paperwork

Rating
1-10

Corporation Requires annual shareholder meetings and at least quarterly board meetings. All meetings must have agendas and corporate minutes. Formalities of creation and running the corporation are strict and failure to do so may result in the corporation being dissolved by the courts.

5

Non-Profit Corporation Requires annual shareholder meetings and at least quarterly board meetings. All meetings must have agendas and corporate minutes. Formalities of creation and running the corporation are strict and failure to do so may result in the corporation being dissolved by the courts.

5

Partnership Every partner is equally liable for any liability of the partnership or another partner. Extremely difficult to dissolve or leave partnership unless partnership agreement provides clear exit structure.

4

Limited Liability Company High amount of protection with the least amount of corporation formalities. Annual update with the Secretary of State is required and a yearly meeting with minutes is recommended.

9

Limited Partnership Initial Partnership Agreement is critical. After that the paperwork is minimal.

7

Limited Liability Limited Partnership (FLP) Creation paperwork is critical and requires several different types of entities, such as LLC’s to also be created so the paperwork burden is massive. After that the paperwork burden does not decrease much. Each entity must be kept up to date and the relationship of the entities must be created by contract.

4

Entities not created by Application to the State (most states)
(Therefore taxed as one of the entities above)
Joint Venture The initial paperwork is critical. After that it is minimal. Joint ventures are usually for a short duration

6

Cooperative The organization agreement is minimal, the members of the cooperative run the co-op and these meetings are important

5

Unincorporated Association Usually there is no paperwork and no protection.

8

Business Trust A business trust is the predecessor the modern corporation. The trust must be set up with care to qualify under state and federal law (IRS) to run a business. Rarely used now days, but appropriate in the right circumstances

4

Business Association Rare and all based on the paperwork

2

What is not reviewed above is running your business as a sole proprietor. There is no paperwork, little accounting and no liability protection. Your tax options are also limited; you are taxed as a sole proprietor. Because it provides no protection, no tax benefits and little value for any other reason, it is not considered an effective way to run a business.

Obviously the best choice now days is an LLC. It can be taxed a multitude of different ways and provides the greatest asset defense for the money with the least amount of paperwork.

The best option is the Limited Liability Limited Partnership; however, you will need to work with an attorney as long as the LLLP is holding assets. Each entity within the LLLP must be properly created and have the correct agreements for the running of that entity and its relationship to the other entities and the LLLP. However, it is virtually impervious to litigation or claims. The problem is the initial costs can be $20,000 and running the LLP can be $5,000 to $10,000 a year in additional legal and accounting fees.

Paperwork

Make sure you complete all the paperwork required to be an entity in the state where you entity was created. That is not just the filing with the Secretary of State. Failure to have the additional paperwork can mean your entity is void. Creditors will go through all of your entity documents and use what you are missing proving your entity is just a sham and close you down.

Entity Name

Type of Paperwork

Corporation Articles of Incorporation

Bylaws

Notices of Shareholder meetings

Notices of Board of Director Meetings

Minutes of Shareholder Meetings

Minutes of Board of Directors meetings

Board Resolutions

Pre-Incorporation Agreement

Consent of Incorporators

Stock Ledger

S-corporation election (if that is the preferred tax method)

Stock Purchase Agreements

Shareholder voting Agreements

Special Meeting Notices

Waiver of Shareholder Notices

Waiver of Shareholder Meeting

Not Mandatory but Important

Buy/Sell Agreement

Stock Sale Restriction Agreement

Non-Profit Corporation Articles of Incorporation

Bylaws

Notices of Shareholder meetings

Notices of Board of Director Meetings

Minutes of Shareholder Meetings

Minutes of Board of Directors meetings

Board Resolutions

Pre-Incorporation Agreement

Consent of Incorporators

Stock Ledger

S-corporation election (if that is the preferred tax method)

Stock Purchase Agreements

Shareholder voting Agreements

Special Meeting Notices

Waiver of Shareholder Notices

Waiver of Shareholder Meeting

Not Mandatory but Important

Buy/Sell Agreement

Stock Sale Restriction Agreement

Closely Held Corporation Agreement

Partnership No paper work is required. However operating a partnership without a partnership agreement that sets forth accounting and exit or dissolution issues can create legal and accounting nightmares.
Limited Liability Company Articles of Organization

Operating Agreement

Minutes of Annual Meeting

Not Mandatory but Important

Buy/Sell Agreement

Stock Sale Restriction Agreement

Limited Partnership Initial Partnership Agreement is critical. After that the paperwork is minimal.
Limited Liability Limited Partnership (FLP) LLLP Agreement

Agreement to create LLLP

LLC Paperwork

Paperwork transferring assets in to LLP

Minutes of Annual Meeting

Contracts for managing all entities owned by the LLLP

Contracts for the operation and management of the LLLP

Proper Paperwork for all entities owned by LLLP

Entities not created by Application to the State (most states)
(Therefore taxed as one of the entities above)
Joint Venture Joint venture Agreement
Cooperative Cooperative Agreement
Unincorporated Association
Business Trust Trust Agreement

The trustee will want to keep meticulous notes and copies of all communications with third parties, assets and beneficiaries of the trust

Business Association Rare and all based on the paperwork

Where should you incorporate.

For decades, everyone wanted to incorporate in Delaware, then Nevada and now day’s South Dakota. Until you can hire an attorney in each of the states where you have an entity, or you want to take your company public, it is not worth the time and money. The cost of putting together and running an LLC in the state where you are doing business can be Ten Percent of the cost of running an LLC in another state.

There is nothing that says after your LLC is up and booming you cannot move it to another state. However, a better idea is to have another entity created in the state where you want to be, own the initial LLC. An example of that is Google was created but is now owned by the Alphabet Corporation. Your LLC can be started in Colorado and when you want to go public, you create a Delaware Corporation which owns the LLC.

Don’t spend $5,000 now to create an entity in a state for something that may happen ten or twenty years from now.

Foreign business wanting to do business in the US.

If you based outside of the US, the information above is no different for you, then it is for a US based business. Create an entity where your business is located or where your attorney is located. That will probably be an LLC that is owned by the entity that you have in your home country. You will have to acquire a Tax Identification Number (TIN or Employer Identification Number (EIN) which are different phrases for the same IRS number).

Once you acquire a TIN you can then open a US bank account to do business.

Summary

Setting up your first entity should not be difficult. Not setting up an entity can be the start of the end. Get good advice, work with someone you get along with and who is willing to explain what you need to know and using this information, concentrate on getting your new business up and running.



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