Choice of Organizational Form for the Start-Up Business
John H. Matheson
University of Minnesota Law School
Minnesota Journal of Business Law & Entrepreneurship, Vol. 1, pp. 7-20, 2002
Individuals embarking on new business ventures must choose a legal form under which to operate. They can form their business enterprises as sole proprietorships, general or limited partnerships, limited liability partnerships, limited liability companies, or corporations. State laws set forth the attributes of each organizational form. These include criteria for limited liability, centralized or decentralized management, transferability of interests, and duration of existence.
Before 1997, the issue of entity choice for the businessperson and legal counselor was tax-driven, and the determination to obtain passthrough tax treatment depended on the corporate resemblance test of the now-discarded Kintner Regulations. Under the Kintner Regulations, unincorporated businesses were taxed as corporations if they had more corporate than noncorporate characteristics.
On January 1 of 1997, the law of business organizations changed dramatically, when the United States Treasury Department's Simplification of Entity Classification Rules became effective. The current system, sometimes referred to as the, "check-the-box regulations," ended decades of manipulation of business organization forms to fit the requirements of the Kintner Regulations and obtain passthrough tax treatment. Only corporations and publicly traded organizations are taxed as separate entities. All other business organization forms have presumptive pass-through federal tax status. Check-the-box regulations reduced the impact of tax issues in the determination of the type of legal organization a business chooses to use.
This article introduces the basic business organization forms and some of the attributes of each that influence the choice of entity decision for the modern start-up business.
Number of Pages in PDF File: 14
Keywords: choice of entity, piercing, tax considerations
Date posted: June 27, 2011