GSB Vol. 6, No. 3 - #2. Choice of Entity With Emphasis on Estate Planning.

AuthorBy Bradley R. Coppedge

Georgia Bar Journal

Volume 6.

GSB Vol. 6, No. 3 - #2.

Choice of Entity With Emphasis on Estate Planning

Georgia State Bar JournalVol. 6, No. 3, December 2000"Choice of Entity With Emphasis on Estate Planning"By Bradley R. CoppedgeI. Background Choice of entity is one of the most important decisions that can be made for a start-up business or for family planning. The options are ever expanding: C-Corporation, S-Corporation, limited liability company ("LLC"), general partnership, limited partnership, limited liability partnership, and limited liability limited partnership. Each of these entities has advantages over the others, such as liability protection, supporting case law, and general operational concerns. Moreover, entity choice has significant tax consequences, some subtle, others not so subtle. The tax choice requires an understanding of Subchapter K of the Internal Revenue Code ( the "Code") for partnerships and LLCs, as well as an understanding of Subchapters C and S of the Code for corporations. In addition, there are other considerations in selecting an entity. Two general scenarios in which choice of entity issues arise are business formation and estate planning. Where business matters are of more primary concern than estate planning matters, the choice is often narrowed to one of the corporate forms or an LLC. To the extent there exists an operating business with employees, there may be some advantage to corporate forms of business (e.g., fringe benefits, etc.). Where the business is primarily real estate based, an LLC taxed as a partnership is most often the best choice.1 On the other hand, where estate planning is the primary concern, the choice is often quickly narrowed to a partnership or an LLC. Partnerships have traditionally been the entity of choice for estate planning (e.g., "Family Limited Partnerships"), though LLCs are gaining favor. Valuation discounts, which are discussed later in this article, are another consideration with regard to estate planning, and are not limited solely to partnerships and LLCs, but may also often be applied with either corporate entity. There is never an "absolute" answer, however, and the facts and circumstances should be considered in every new situation. This article will focus primarily on the use of partnership entities and LLCs taxed as partnerships. II. Entities Taxed As Partnerships A. Partnerships In a number of states, there are now four choices of partnership entity. For a long time, the only options were a general partnership and a limited partnership. In a general partnership, all partners are "general" partners, which means each partner can bind the partnership and no partner has any liability protection from debts of or claims against the partnership. In a limited partnership, there exist both general and limited partners. The limited partners have limited liability, but are also limited in their authority to act on behalf of the partnership or participate in partnership management. Until recent years, the traditional limited partnership was often the vehicle of choice for estate planning. In recent years, several states, including Georgia, have added two new forms of partnerships:limited liability partnerships ("LLP")3 and limited liability limited partnerships ("LLLP").4 An LLP (or "double LP") could also be called a limited liability "general" partnership ("LLGP"), because each partner is a general partner, having authority to bind the partnership and manage the same, though each has limited liability. In an LLLP ("triple LP") the limited partners as well as the general partners have limited liability. In this author's opinion, there is almost no reason to form a new partnership as a traditional general partnership or limited partnership. Through one additional step with both entities, the general partners may also be granted the shield of limited liability. This is true in an LLLP even where the sole general partner is a closely held corporation with minimal capitalization. There is simply no reason not to add this protection.5 For family estate planning purposes, a partnership will, in fact, still often be the entity of choice, in part because of clients' familiarity with it and in part because they still "work" fine. Although it is always essential to respect the entity, whatever it may be, as separate and apart from its owners, partnerships are attractive entities because there are fewer formalities and less ongoing documentation required for partnerships and LLCs: no stock certificates to maintain, no annual meetings, no shareholder meetings, no minutes, etc. It is still advisable, however, to document actions through partnership minutes, as well as to provide written documentation of transfers and partnership amendments. In forming a family limited partnership ("FLP")6 , it is essential that general partners own at least a 1% interest. Specifically, section 4.01 of Revenue Procedure 89-12 generally requires that the collective interests of the general partners must be equal to at least 1% of the total...

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