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Overview
Typically, a business can be organized as a disregarded entity, partnership, C corporation, or S corporation. Each entity choice will have different tax benefits and tax costs, so it is important to understand how those tax benefits and costs will impact your client and how you can use your client's business structure to meet its needs and priorities.
For example, if your client is a smaller, new business where the founders will be primarily providing the labor and the business won't be profitable for a while, what tax entity will be the best fit? Does your client need flexibility in how its profits and losses are distributed to the founders? What tax entity will minimize self-employment tax? These questions, and more, are important to think about when advising your client on entity choice.
Treatises, Databases, and Websites
Sources Available Through UChicago
- Practical Law Guide - Startup Company ToolkitPractical Law has a set of resources called "Toolkits" which contain links to practice notes related to the topic and forms. The Startup Toolkit has a practice note that gives an overview of the tax consequences of entity choice, and this is a good place to start your research. However, these materials do not consistently include references to the applicable Internal Revenue Code sections or other primary authority.
- IICLE e-Books"Business Law (Illinois): Choice of Entity Issues and Corporations 2015 Edition" and
"Elements of Illinois Law: Organizing and Advising Small Business 2015 Edition" provides an overview of the federal and Illinois tax considerations when choosing a tax entity. This is another general overview that provides more detail than the Practice Note in Practical Law, but the information presented is more digestable than the databases listed below making it a great place to start research. - Bloomberg BNA U.S. Income PortfolioThe BNA Portfolios are encyclopedia entries that provides a detailed overview of issues related to tax with references to the underlying Internal Revenue Code sections, Treasury Regulations, case law, and other primary authority. This is one of the most authoritative secondary sources for tax research, but the material covered is more dense than the Practice Note or the IICLE e-book. You can find the portfolios listed in the "Expert Analysis" box, and to find an entry on Choice of Entity issues, please see the "Partnerships" portfolio.
- Bloomberg BNA Tax Practice SeriesThe Tax Practice Series is a legal encyclopedia that contains in-depth information about partnerships, S Corporations, and C Corporations in the "Expert Analysis" box of the home page. These entries provide a more in-depth look at the different tax schemes for C Corporations, S Corporations, and partnerships and provides references to relevant primary sources.
- Lexis Practice AdvisorLexis Practice Advisor provides sample forms, drafting tips, primary law coverage and analysis, all arranged by practice area. To find information regarding tax entities, go to the "Corporate Counsel" link.
- Cheetah Federal Tax DatabaseThis database has a couple of business entity planning tools. For example, one tool allows the user to try to compare LLC requirements for different states. This is a useful tool if the client is trying to determine a) whether the business should be an Illinois business or a foreign business operating in Illinois and b) what the client's responsibilities would be if it operated in different states. If you search "entity choice" in the search bar, there are also decision trees and treatises that provide summaries of the tax consequences of entity choice.
Free Sources
- Internal Revenue Service Small Business and Self-Employed Tax CenterThe IRS Small Business and Self-Employed Tax Center is a centralized location for all resources published by the IRS for small business owners. This website contains helpful charts and brief explanations that are meant to be useful for the taxpayer. The IRS website is a good resource to consult and get a general idea of the concepts, but it should not be the end of your inquiry.
- Illinois Department of RevenueThe Illinois Department of Revenue site contains information regarding Illinois taxes. The website is not as well organized as the IRS Small Business and Self-Employed Tax Center, which makes the IDOR website a better resource for obtaining forms related to your client's entity choice not for starting research.
- Small Business Administration - Choose Your Business StructureThis website provides more detailed descriptions of the pros and cons of the different entity types, as well as some information on the steps necessary to form the business entity. This website is more detailed than the IRS website, but the information is presented in a way that is easy to read.
