Sample situations to assist with setup decision-making

These situations actually occurred; names have been omitted to protect identities.

Multiple Ventures

Non-client contacted me about some significant changes that may take place and the options available to her. At the time she was operating as a sole proprietor and I suggested that she change her type of entity to a limited liability company and elect S Corporation status. She was also now going to enter into a separate business with her boyfriend and I suggested, since they were not married and had no plans to wed, that they incorporate and elect S Corporation status. And finally, she said that they were going to purchase the property that housed these businesses and the residence they had been renting for several years. She added that there were a couple of other residential rentals and income producing trees on the nearly 20 acre parcel. Her boyfriend recommended a joint tenancy agreement but I suggested instead that a limited liability company be created for the mixed-use property ownership and this legal entity should be taxed as a Partnership.

Takeaway a�� Three separate business ventures = three separate legal entities.

Moving to Colorado

Non-client contacted me about business filing requirements here. She stated that she was operating as a limited liability company in her current state and was planning to move to Colorado within the next few months. I asked, a�?Any plans to move back in the future?a�? She replied probably nota��no. Given the state she was moving from, I suggested that she terminate all ties with the soon to be former residing state and start a�?fresha�? here in Colorado even though she was going to use the same legal name here as there. Further, a new EIN was not a headache since she was going to open a new business account here at a local bank. She organized a Colorado limited liability company and eventually elected S Corporation status.

Takeaway a�� Starting fresh eliminates duplicative compliance requirements.

Husband and Wife Considerations

Non-client contacted me about the business he was going to setup and his desire to list both he and his wife as owners. I asked, a�?Do both of you generate revenue for the business or does just one spouse play an active role in the day-to-day operations?a�? He stated that the business is to be his consulting practice. I suggested that a single-owner limited liability company or profit corporation makes more sense and that they should meet with an attorney to discuss appropriate legal documents in light of estate and will considerations. I further suggested that he could hire his spouse if she performed legitimate back-office functions. He organized a single-owner limited liability company and eventually elected S Corporation status.

Takeaway a�� Certain spousal ownership percentage games are generally viewed as folly.

Source of Income

Non-client contacted me about appropriate business structures for his new venture. I asked him my standard three questions and given the nature of his business, I asked one follow up, a�?Will your income be derived primarily from Colorado sources or are a majority of your contracts with out-of-state businesses?a�? He stated the latter and I suggested that he incorporate rather than organize as a limited liability company since he also desired to elect S Corporation status regardless of legal structure.

Takeaway a�� While not always easy to anticipate, interstate commerce should be considered at inception.

Landlord and Tenant

Client contacted me to mention that he was looking to relocate within town and purchase the commercial space his business required. He asked if he should purchase the condo with his corporation. I immediately said no for two reasons. First, there are distinct tax advantages of real estate being held outside a corporate structure and second, he might want to sell his business in the future and keep the real estate as an additional income stream while retired. He organized a multi-owner limited liability company for the real estate concern with himself and his family as owners and maintained the default tax structure of a Partnership.

Takeaway a�� Separate bank accounts and tax returns might be cumbersome but the payoff down the road is generally worth the extra work.


Non-client contacted me about the retail store she and her sister were going to open within the next couple of months. I asked, a�?Family owed and family run?a�? She said yes as their children would help out from time-to-time. I suggested a limited liability company regardless of the relationship of planned employees. Further, multi-owner tax structure decisions could be made after the businessa��s initial year of operation. They elected to be taxed as an S Corporation.

Takeaway a�� An LLC is a viable legal structure for businesses with employees.

Ownership Change

Client contacted me that he was going to sell two-thirds of his company to two key employees. He was currently operating as a limited liability company that was organized in another state. Since the three parties were unrelated and the founder wished to maintain control, I suggested that a profit corporation be created instead of selling interests in his LLC, which would give him control by having two classes of stock, voting (founder) and non-voting (key employees), while allowing each to own one-third of the business. Appropriate assets and contracts were transferred to the new company (profit corporation) and the old company (limited liability company) now is home to new entrepreneurial venture of the founder.

Takeaway a�� Sometimes a fresh start during times of significant change is more logical than attempting to modify current legal and tax structure.

New Business Opportunity

Client contacted me that he was exploring another venture that was separate from his current one. I asked, a�?How different?a�? He said he would be selling product and the products have nothing to do with the services he now provides. I suggested that a separate legal entity should be created for the new venture. Had the products been related to the services offered then the two revenue streams could have been run through the current company unless complete separation made sense from a potential business sale standpoint. He organized another limited liability company.

Takeaway a�� Separate accounts, accounting and returns generally payoff when a business is sold to another party.

Rental Property in Another State

Client contacted me to mention that she would be inheriting some properties in another state and wondered what she should do. I suggested that she consider setting up a limited liability company in that state and transfer title accordingly. I further stated that the LLC is merely for legal protection as additional business returns were not required since she was the sole owner and rental income and expense would be reported on Form 1040, Schedule E. The only drawback, an additional state return would be required for the allocable rental activity.

Takeaway a�� Legal entities provide an additional layer of liability protection that insurance alone cannot.

Friends Going into Business Together

Non-client contacted me to discuss a business opportunity she was exploring. She said they were going to acquire and flip foreclosed homes. They both currently operated separate businesses in the real estate industry a�� one as a stager, the other as a remodeler. I suggested a limited liability company given the chance they might acquire a property that they are later forced to lease out, but she desired a legal structure that afforded the strongest liability protection. Accordingly, I suggested a profit corporation that should elect S Corporation status and also recommended that they consider a buy-sell agreement. They did as suggested.

Takeaway a�� Sometimes the commonplace must be modified to fit a taxpayera��s desires.

Timing of S Corporation Election

Non-client contacted me about appropriate business structures for his venture. I asked him my standard three questions and given the nature of his business, I asked one follow up, a�?Do you plan to acquire a new truck for the business?a�? He said maybe late this year or early next year. I suggested that he create a limited liability company for his single-owner business, hold off on electing S Corporation status and accelerate the purchase of a new truck to this year given that he had earned wages during the first half of the year. The assumed tax savings were warranted and he elected S Corporation status effective on the first of the following year.

Takeaway a�� Businesses created mid-year must weigh tax implications before tax structure decisions are made.

Entity Conversion

Client contacted me that an outside enterprise was interested in becoming an investor in his profit corporation taxed as an S Corporation. I asked, a�?What type of entity is the out-of-state investor?a�? He said it was Partnership. I replied that a Partnership or C Corporation cannot be a shareholder in an S Corporation and that his options were few. I said the logical option would be for his venture to convert from a profit corporation to a limited liability company with the Secretary of State and file Form 8832 with the Internal Revenue Service. The business would still be a pass-through entity and a number of transfer issues would need to be ironed out, some of which may have adverse tax affects. He converted his enterprise and the cash infusion from the new investor more than offset the individual tax hit arising from conversion.

Takeaway a�� Initial structure choices sometimes are wrong when unanticipated events occur in the future.

Adding Out-of-State Office

Client contacted me that he was hiring a commissioned sales person in an adjoining state. I asked, a�?Employee or Independent Contractor?a�? He stated 100% commissioned non-employee. I replied, a�?Would you be providing 100% of his income?a�? He stated no. I followed up, a�?Are you paying his office rent?a�? He stated no. I asked one final question, a�?Are you providing any equipment, such as computers or phones?a�? He stated no. I replied that since this contractual arrangement appeared to be for an outside commissioned sales rep, no action was required to be taken with any agencies within the adjoining state. Of course, that would not have been the case if this individual was treated as an employee.

Takeaway a�� Nexus is a complex matter and a thorough assessment of relationships and transactions should be performed to determine if nexus applies.

Trade Name

Non-client contacted me about business name requirements as he wished to create a limited liability company. I asked, a�?Do you now operate under a trade name?a�? He said yes and I stated that he could create the LLC with the same name but now with a backend designator, such as comma LLC or space LLC. And then he could let the trade name lapse at the time of renewal since his legal name was the same.

Takeaway a�� It is natural to migrate from a trade name to a legal name using the same name. fgr 100 pills

Caveat – Please contact your legal, business and tax advisors to determine appropriate compliance with federal, state and local law and related filing requirements for your particular business.

Disclaimer – Advice, instruction and forms provided above are for illustrative purposes only and are offered as a public service without representation or warranty and is not intended or written to be used, and cannot be used, for the purposes of constructing unlawful acts under federal and state law or avoiding penalty under the internal revenue code.