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BUSINESS ENTITIES & MORE
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Office of Income Taxation Communications & Training Branch
CT200 Business Entities & More AUGUST, 2009
Business Entities – Basics & More
BUSINESS ENTITIES
BASICS AND MORE
INTRODUCTION
Of all the choices made when starting a business, one of the most important is the
type of legal organization selected for the entity. For most entities, the original
structure remains intact for the life of the entity.
This decision can affect how much the business pays in taxes, the amount of
paperwork required, how liability is assigned and even the ability to borrow money.
All businesses must file an annual return. It may be a tax return or an informational
return. The form used depends on how the business is organized. Business formation
is controlled by the law of the state where the business is organized.
The answer to the question “What structure makes the most sense?” depends on the
individual circumstances of each business entity. Making an informed choice on how
best to structure the entity will involve several factors, including:
• Taxation
• Recordkeeping
• Liability
The material in this manual will detail how businesses may be structured, filing
requirements, forms used, and more. In addition, pros and cons of the various
structures will be discussed.
Business Entities – Basics & More
Contents:
Sole Proprietorships
Formation .............................................................................. 3
Filing Requirements ................................................................... 3
Required Forms......................................................................... 4
Dissolution............................................................................... 4
C Corporations
Formation .............................................................................. 6
Filing Requirements ................................................................... 9
Required Forms........................................................................ 10
Dissolution.............................................................................. 10
S Corporations
Formation ............................................................................. 16
Filing Requirements .................................................................. 17
Required Forms........................................................................ 17
Dissolution.............................................................................. 17
Limited Liability Companies
Formation ............................................................................. 23
Filing Requirements .................................................................. 24
Required Forms........................................................................ 24
Dissolution.............................................................................. 25
Partnerships
General Information ................................................................. 28
General Partnerships
Formation ............................................................................. 31
Filing Requirements .................................................................. 32
Required Forms........................................................................ 38
Dissolution.............................................................................. 38
Limited Partnerships
Formation ............................................................................. 43
Filing Requirements .................................................................. 44
Required Forms........................................................................ 44
Dissolution.............................................................................. 44
Limited Liability Partnerships
Formation ............................................................................. 49
Filing Requirements .................................................................. 50
Business Entities – Basics & More
Required Forms........................................................................ 50
Dissolution.............................................................................. 50
Qualified Investment Partnerships
General Information ................................................................. 53
Non Profit Organizations
Formation ............................................................................. 57
Filing Requirements .................................................................. 59
Dissolution.............................................................................. 61
Real Estate Investment Trusts
Advantages ............................................................................. 64
Disadvantages.......................................................................... 65
Taxation ................................................................................ 65
Disregarded Entities
Defined ................................................................................. 68
Options.................................................................................. 68
Entity Comparisons ....................................................................... 71
Secretary Of State ........................................................................ 75
Statutes & Regulations ................................................................... 81
References .................................................................................. x
Business Entities – Basics & More
DISCLAIMER
The information in this manual is for educational and informational purposes
only and does not constitute legal advice. Information is presented as an
overall review that is subject to law changes and may not apply to all states.
For accurate information on tax treatment of entities by specific states please
reference appropriate state statutes.
In the event that any information in this manual is later determined to be in error, this
manual cannot be used by taxpayers in supporting a specific position or issue before
the Department of Revenue as it does not have the statutory or regulatory authority.
Sole Proprietorships
SOLE PROPRIETORSHIPS
Contents:
Formation............................................................................................. 3
Filing Requirements................................................................................. 3
Required Forms ...................................................................................... 4
Dissolution ............................................................................................ 4
1
Sole Proprietorships
SOLE PROPRIETORSHIPS
A business with a single owner with Sole proprietors can operate any kind
no formal or separate form of of business. It must be a business, not
business structure is known as a sole an investment or hobby. It can be
proprietorship. The vast majority of full-time or part-time work. This
small businesses start out as sole includes operating a:
proprietorships. These firms are
owned by one person, usually the • Shop or retail trade business
individual who has day-to-day • Large company with employees
responsibility for running the • Home based business
business. The owner has sole control • One person consulting firm
and responsibility for the business.
Every sole proprietor is required to
A sole proprietorship typically has keep sufficient records to comply
fewer legal restrictions than other with federal and state tax
entity types. In this situation the requirements regarding business
owner and the business are records.
indistinguishable. In the eyes of the
law and the public, the owner and
the business are one and the same.
Thus, the life of the business and Advantages of a Sole Proprietorship
owner are the same and the business
cannot be transferred to others. • Easiest and least expensive
form of ownership to organize.
Sole proprietors own all the assets of • Sole proprietors are in
the business and the profits complete control, and within
generated by it. They also assume the parameters of the law,
complete responsibility for any of its may make decisions as they see
liabilities or debts. fit.
• Sole proprietors receive all
The sole proprietor’s responsibilities income generated by the
include: business to keep or reinvest.
• Profits from the business flow-
• Furnishing capital through directly to the owner's
personal tax return.
• Recordkeeping
• The business is easy to
• Obtaining state & local
dissolve, if desired.
licenses & permits
• Personal liability
• Reporting income on
personal income tax return
2
Sole Proprietorships
Disadvantages of a Sole 6. Estimate financial needs and
Proprietorship plan accordingly.
7. Purchase any supplies and
• Sole proprietors have unlimited equipment needed.
liability and are legally 8. Open the doors for business.
responsible for all debts
against the business. Their
business and personal assets
are at risk. NOTES
• May be at a disadvantage in
raising funds and are often Business and income profits and losses
limited to using funds from are reported on your personal tax
personal savings or consumer return.
loans.
• May have a hard time A sole proprietorship can include your
attracting high-caliber spouse.
employees, or those that are
motivated by the opportunity Sole proprietors can set up retirement
to own a part of the business. plans through a Keogh plan.
• Some employee benefits such
as owner's medical insurance
premiums are not directly
deductible from business FILING REQUIREMENTS
income (only partially
deductible as an adjustment to Income from a sole proprietorship
income). must be included on the taxpayer’s
individual income tax return.
Generally, sole proprietors file
Schedule C or C-EZ, Profit or Loss
HOW TO FORM A SOLE from Business, with their Form 1040.
PROPRIETORSHIP Sole proprietor farmers file Schedule
F, Profit or Loss from Farming. Net
To form a sole proprietorship: business income or loss is combined
with other income and deductions
1. Choose the type of business and taxed at individual rates on the
you wish to operate. taxpayer’s personal tax return.
2. Pick a name for the business.
3. Obtain necessary licenses and Sole proprietors must also pay self-
permits. employment tax on the net income
4. Determine where the business reported on Schedule C or Schedule
will be located. F. You may also be able to deduct
5. Set up a record keeping one-half of SE tax on your 1040. Use
system. Schedule SE, Self-Employment Tax, to
compute this tax.
3
Sole Proprietorships
DISSOLUTION
Sole proprietors do not have taxes Sole proprietorships may end due to a
withheld from their business income variety of reasons. Sale of the
so you will generally need to make business, illness or death of the
quarterly estimated tax payments in owner, under-capitalization, lack of
order to avoid penalties if your profitability or transformation into a
business income is above certain different type of entity, such as a
threshholds. partnership, limited liability
corporation or S-corporation are all
valid reasons for ending a sole
proprietorship.
PRIMARY REQUIRED FORMS
Unlike a corporation that needs to be
Federal Tax Forms That a Sole dissolved (this requires filing articles
Proprietorship May Need to File of dissolution with the secretary of
state) or a limited liability company,
• Form 1040: Individual Income which also needs to be dissolved, a
Tax Return sole proprietorship ends when you
• Schedule C: Profit or Loss from stop doing business.
Business (or Schedule C-EZ)
• Schedule SE: Self-Employment
Tax
• Form 1040-ES: Estimated Tax
for Individuals
• Form 4562: Depreciation and
Amortization
• Form 8829: Expenses for
Business Use of your Home
• Employment Tax Forms
Kentucky Tax Forms That a Sole
Proprietorship May Need to File
• Form 740: Individual Income
Tax Return
• Form 740NP: Nonresident or
Part-Year Resident Income Tax
Return
• Form 740-ES: Estimated Tax
Vouchers
4
C Corporations
C CORPORATIONS
Contents:
Formation............................................................................................. 6
Filing Requirements................................................................................. 9
Required Forms .................................................................................... 10
Dissolution .......................................................................................... 10
5
C Corporations
C CORPORATIONS
A corporation whose profits are taxed • Owners are not personally liable
separate from its owners under
Subchapter C of the Internal Revenue The primary advantage to having a
Code is known as a C corporation and business formed as a corporation is the
commonly called a C corp. C fact that the owners are not personally
corporations differ from an S liable for the debts and legal liabilities
corporation, in that an S corporation’s incurred by the corporation. For
profits are passed through to example, if a corporation is sued for
shareholders and taxed on their personal business reasons and loses, the owners
income tax return. will not be required to satisfy the debts
of the corporation from their own
Most publicly-traded companies — and all personal assets. This safeguards assets
major ones — fall under this and properties of the individual owners,
classification. For United States tax and as such, is more attractive to
purposes, C corporations are required to potential investors.
pay income taxes on their profits. One
advantage to a C corporate structure is
the fact that, unlike S corporations,
there is no limit to the number of • Has a more complex structure
shareholders. A disadvantage is the fact
that, because a C corporation is taxed Another important thing to know about
itself and its individual shareholders are the formation and maintenance of a
taxed on distributions and dividends, it is corporation is that certain corporate
subject to double taxation. formalities must be observed. These are
things like a required annual meeting of
the board of directors, the need to
Characteristics of a C Corporation maintain the corporate “minutes,” the
separation of corporate and personal
funds (no “co-mingling” of funds), and a
A C corporation: necessity to maintain written agreements
for all corporate transactions (including
• Is legally independent from its internal transactions such as internal
owners loans, executive compensation
agreements, etc.).
A traditional Corporation (or a “C”
corporation) is a business structure that • Has a board of directors and
is created as a separate, distinct legal shareholders
entity from its owners (or
“shareholders”). Once a corporation is Once a corporation is established, the
formed, the corporation can have its own shareholders must name (via election) a
bank accounts, own property, conduct board of directors that is responsible for
business, and even establish a line of the operation of the business, making
credit, irrespective of the individual business decisions, and managing all
accounts or credit of the shareholders. business-related affairs. The board
6
C Corporations
appoints “officers” of the corporation to income. For example, the owner of a C
specific duties. corporation’s salary and those of
employees are tax-deductible for the
business.
ADVANTAGES of a C CORPORATION
• Fringe Benefits
• Limited Liability for Shareholders
While all business entities can provide
fringe benefits to its owners and/or
This limits the liability of the
employees, the structure of a
owners/investors to only the amount
corporation allows for a greater range of
of their investment. The owners of a
benefits.
corporation are not personally liable
for business debts, claims, or other
liabilities.
• Perpetual Existence
• Certain Tax Benefits
The existence of a corporation is
Tax rate on certain tiers of corporate
considered perpetual, although it can be
income is usually lower than the
comparable tax rate on similar tiers of terminated voluntarily by its owners
personal income. The owners can arrange (shareholders). The board carries on the
salaries and bonuses in conjunction with company, not the owner. That means
retained corporate earnings to lower that a corporation can last longer than an
their overall tax rate. owner-based company such as an LLC.
Corporations have many other tax breaks
and expenses they may use to offset
• Ability to Raise Capital and taxable income, including:
Attract Investors
o Rents
Investors are protected so they are more o Repairs and maintenance
likely to invest in the corporation. o Bad debts
Additionally, the corporation may choose o Depreciation
to issue stock or stock options to o Profit-sharing and
employees. employee benefit plans,
including insurance and
pensions
o Charitable donations
• Tax Deductions
Even if a small business is quite
profitable, a C corporation is entitled to
so many deductions that it may be
possible to greatly reduce business
7
C Corporations
DISADVANTAGES of a C CORPORATION requirements) is known as an “S
corporation.”
• Double Taxation Pitfall HOW TO FORM A C CORPORATION
A major disadvantage of the traditional To form a C corporation, you will need to
corporation is double taxation. A register your business name, file a
traditional C corporation pays tax on all certificate of incorporation or articles of
corporate (business) income, and then incorporation and complete other
once a distribution is made to the necessary paperwork. You will also need
shareholders, the individual shareholders to draft corporate bylaws and hold a
pay income tax again on these board of director's meeting.
distributions or dividends.
Steps to Forming a C Corporation
• Cost of Setup
1. Choose an available business name
It's may be costlier to start than a sole that complies with your state's
proprietorship or partnership. corporation rules.
• Extensive Record- 2. Appoint the initial directors of your
keeping Requirements corporation.
Corporations typically require more 3. File formal paperwork, usually called
ongoing paperwork than most other "Articles of Incorporation," and pay a
business entities in order to stay filing fee (to the Secretary of State for
compliant with the law and maintain Kentucky) that ranges from $40 to $800,
their corporate status. This includes depending on the state where you
holding and documenting annual incorporate.
meetings of shareholders and directors
and keeping minutes of important 4. Create corporate "bylaws," which lay
corporate meetings. It can be difficult out the operating rules for your
and labor intensive to maintain the corporation.
necessary paperwork for a C corporation
than other type entities. 5. Hold the first meeting of the board of
directors.
Note: One way to avoid the double 6. Issue stock certificates to the initial
taxation dilemma is to establish the owners (shareholders) of the corporation.
corporation as a “pass through” entity
like a partnership wherein all corporate 7. Obtain licenses and permits that may
profits pass through to the individual be required for your business.
shareholders and they are then
responsible for the tax burden. A 8. Register with the Secretary of State.
corporation that has made the election
to be treated in this manner (by making
the appropriate filings and meeting the
8
C Corporations
(f) Corporations or other entities exempt
under Section 501 of the Internal
FILING REQUIREMENTS Revenue Code;
(
All domestic corporations must file an g) Religious, educational, charitable, or
income tax return with the IRS and like corporations not organized or
Kentucky whether or not they have conducted for pecuniary profit;
taxable income unless they qualify for
exempt status. (h) Corporations whose only owned or
leased property located in this state is
For federal purposes, the most common located at the premises of a printer with
exempt corporations are those not for which it has contracted for printing,
profit organizations exempt under IRC provided that:
Section 501, which is discussed later in
this material. A listing of exempt 1. The property consists of the final
corporations for Kentucky may be found printed product, or copy from which the
under KRS 141.040, as follows: printed product is produced; and
141.040 Corporation income tax -- 2. The corporation has no individuals
Exemption -- Rate. receiving compensation in this state as
provided in KRS 141.120(8)(b); and
(1) Every corporation doing business in
this state, except those corporations (i) For all taxable years except those
listed in paragraphs (a) to (i) of this beginning after December 31, 2004, and
subsection, shall pay for each taxable before January 1, 2007, S corporations.
year a tax to be computed by the
taxpayer on taxable net income or the
alternative minimum calculation Additional Filing Requirements
computed under this section at the rates Once a corporation (foreign or domestic,
specified in this section: business or nonprofit) is registered with
the Secretary of State, it has a few
(a) Financial institutions, as defined in continuing obligations. These include:
KRS 136.500, except bankers banks
organized under KRS 286.3-135; • File an annual report by June 30
of each year;
(b) Savings and loan associations • Report any change in the
organized under the laws of this state corporation's registered agent or
and under the laws of the United States registered office on a Statement
and making loans to members only; of Change of Registered Office or
Registered Agent or Both as soon
(c) Banks for cooperatives; as those changes occur;
• Report any change in the principal
(d) Production credit associations; office address to the Secretary of
State on a Statement of Change of
(e) Insurance companies, including Principal Office Address
farmers or other mutual hail, cyclone,
windstorm, or fire insurance companies,
insurers, and reciprocal underwriters;
9
C Corporations
HOW is a C CORPORATION TAXED? DISSOLUTION
Unlike many other business entities in
which the profits pass through to the The first step in officially dissolving a
owners’ personal tax return (e.g. LLCs, S
corporation is the adoption of a
corporations, etc.), the C Corporation is
a completely separate taxable entity. corporate resolution to dissolve by the
The C corporation pays federal taxes on board of directors. A vote must be taken
the net profits (after all expenses, and the minutes of the meeting must be
including salaries and bonuses) of the recorded and retained in the corporate
business. The after tax profits can be
records. Once the resolution has been
paid out to the owners (shareholders) in
the form of dividends, or retained for approved by the board of directors, it
reinvestment of the business. must also be approved by a majority (in
some cases two-thirds) of the
corporation's shareholders.
PRIMARY REQUIRED FORMS
Next, the corporation needs to file
Federal Tax Forms Required for a C Articles of Dissolution with the Secretary
Corporation of State. In some states this is done with
a simple certificate while others require
• Form 1120: U.S. Corporation a more complex process. Once the state
Income Tax Return, or Form has approved the dissolution, the
1120-a, U.S. Corporation Short-
Form Income Tax Return, corporation's assets can be distributed to
and its shareholders.
• All other appropriate related
Federal Schedules
Kentucky Tax Forms Required for a C FAILURE TO OFFICIALLY DISSOLVE
Corporation
The consequences of not properly
• Form 720: Kentucky Corporation
Income Tax and LLET Return dissolving a corporation can be severe;
• Schedule LLET Limited Liability therefore taking the necessary steps to
Entity Tax officially dissolve should be followed.
• All other appropriate related Aside from a lack of corporate closure,
Kentucky Schedules
some of the consequences you may be
10
C Corporations
forced to deal with include the following:
• Tax Filings. Until the corporation
is formally dissolved for tax
purposes*, it will continue to be
required to file all relevant
federal, state, and municipal tax
reports. Failure to do so will
result in the normal penalties and
fees associated with a late filing.
• Personal Liability. Since the
business is still considered a
legally viable entity, its officers,
directors, and shareholders may
be personally liable for the
corporation, even if it is no longer
doing business.
• Annual Reports. Your corporation
will need to file annual reports
every year (and pay the penalties
for neglecting to file them) until
the corporation is dissolved.
• Future Product Liability. A
corporation that has not been
officially dissolved continues to
risk future product liability from
the products it sold while it was
in operation.
• Asset Allocation Delay.
Shareholders are not legally
entitled to their share of the
corporation's assets until it has
* Administrative dissolution via the
been officially dissolved with the
Kentucky Secretary of State does not
secretary of state.
exempt corporations from Kentucky
tax filing requirements. Corpora-
tions must file formal Articles of
Dissolution in order to properly
terminate their requirement to file
tax returns
11
C Corporations
12
S Corporations
S CORPORATIONS
Contents:
Formation........................................................................................... 16
Filing Requirements............................................................................... 17
Required Forms .................................................................................... 17
Dissolution .......................................................................................... 17
13
S Corporations
terminate.
S Corporations
A corporation is a legal and tax entity by
itself. It is similar to a person in that it ADVANTAGES of an S CORPORATION
has its own assets and tax identification
number, called a Federal Tax The primary advantage of forming a
Identification Number (FEIN). corporation is that it is a separate legal
and tax entity from its owner(s). If you
An S corporation is a corporation which is form a corporation, the corporation will
taxed under Subchapter S of the Internal grant you shares.
Revenue Code. Unlike a C corporation, S
corporations are pass-through business Shareholders are not liable for the debts
entities, meaning any profit or losses are or acts of the corporation as long as they
passed through to the owners and abide by the corporate procedures
reported on their personal tax returns. required by law. The most a shareholder
can lose is the amount invested for
If it meets the qualifications, a C shares of the corporation. This means
corporation can elect to be taxed as an S that if the corporation is sued and loses,
corporation at any time. For purposes of they cannot take personal assets such as
dissolution, by default, corporations are a home, personal cars and other personal
considered C corporations unless they assets.
have elected S corporation status.
Another advantage is that corporations
There are certain requirements a are regarded as a more professional
corporation must meet to be an S business-like structure. Venture capital
corporation. The general requirements and investors usually prefer to invest in
are that there must be no more than 100 corporations as they provide the most
shareholders, the election to be an S flexible and consistent procedures for
corporation must be made timely, and business and investment.
there can only be one class of stock
issued by the corporation. If you are an S corporation, you are not
subject to the double taxation which can
Like other business entities, an S occur when a corporation pays income
corporation needs to have a license to do tax and then shareholders pay tax on
business in locations in which it has dividends as well. There are also other
offices. S corporations may use an tax benefits.
assumed name, so for example, Roses
Inc. may, in fact, operate as Derby Other advantages include:
Roses.
• Corporate losses can be
A corporation's assets or ownership is passed through to the
easily transferred through sale of the shareholders and as the
assets or sale of stock. The death of the owner (and shareholder) you
shareholders or directors or officers of a may be able to take the loss
corporation has no effect on the against income that appears
existence of the corporation. A on your personal return.
corporation must be legally dissolved to
14
S Corporations
• You can have the protection • Like a C corporation, it can
of limited personal liability be costly to set up and follow
without having to pay formalities.
corporate taxes. • Close scrutiny by the IRS of
• You can minimize self- shareholder-employees, who
employment tax and FICA must receive reasonable
tax. Profits, as a compensation (subject to
shareholder, are not taxed in employment taxes) before
this manner. any non-wage distributions
• It is easier to raise capital as may be made to that
a corporation than as a sole shareholder-employee.
proprietorship or
partnership. Other regulations imposed on S
Corporations include:
• All shareholders must be U.S.
citizens.
• Benefits such as health or
DISADVANTAGES of an S CORPORATION:
accident insurance for
Many of the disadvantages of an S employee shareholders (with
corporation can be attributed to costs at least 2 percent
and regulations. The costs and effort of partnership) may not be
maintaining a corporation are higher than deducted by the corporation.
some other business forms due to legal
requirements such as annual shareholder
meetings, maintaining corporate minutes
and other procedures which must be ELIGIBILITY
followed.
What factors are required for a
In addition, a corporation which has an corporation to be eligible for S
office in a state other than the one it’s corporation status?
incorporated in must register as a foreign
corporation in that state. The cost of The corporation must:
incorporation, maintaining an agent for
service (a person to receive legal • Be filed as a U.S. corporation.
documents required by law), registering • Maintain only one class of stock.
as a foreign corporation and upkeep of • Maintain a maximum of 100
corporate procedure documents is higher shareholders.
than some other forms of business. • Be comprised SOLELY of
shareholders who are individuals,
Other disadvantages include: estates or certain qualified trusts
or certain tax exempt
• Numerous regulations and organizations. Partnerships and C
requirements that must be Corporations are not eligible to
upheld by an S corporation hold stock in an S Corporation.
including a limit of no more • Have only citizens or residents of
than 100 shareholders.
15
S Corporations
the United States as shareholders. Corporations elect S Corporation status
using IRS Form 2553. Each shareholder at
Failure to observe ANY of the above the time the form is filed must sign the
requirements could revoke S corporation form.
status at any time.
Submitting Form 2553
IRS Form 2553, Election by a Small
STEPS TO FORMING AN S CORPORATION Business Corporation must be filed:
In order to create an S corporation, the • Before the 16th day of the 3rd
organizers of the business must take the month of the corporation's tax year,
following steps: • Before the 15th day of the 2nd
month of a tax year lasting 2-1/2
1. Draw up articles of incorporation, months or less,
by-laws, and various resolutions, • At any time during the tax year
2. Incorporate the business as a before the tax year the election is to
corporation in the state where the take effect,
company will conduct the bulk of its • At any time after these deadlines
business, if the corporation follows special
3. Verify that the corporation meets rules for making a late S corporation
the eligibility criteria for being an S election.
corporation, and
4. Notify the IRS of its intention to be
taxed as an S corporation by filing
IRS Form 2553 no later than the 15th TAX TREATMENT
day of the third month following its
date of incorporation. S corporation profit or loss is passed
5. Follow appropriate requirements of through to shareholders and reported on
Secretary of State. the shareholders’ tax returns. A
Subchapter S corporation generally does
not pay tax at the corporate level.
Electing S Corporation Status Exception: If the Subchapter S
corporation was previously a C
corporation, the Subchapter S
The election of S corporation status must
corporation may be liable for tax on
be made by a qualified corporation, with
excess net passive income, LIFO reserve
the unanimous consent of the
recapture, and net built-in gains.
shareholders, on or before the 15th day of
the 3rd month of its tax year in order for
the election to be effective beginning Subchapter S Corporation Estimated Tax
with the year when made. If the election Requirements:
is made after the 15th day of the 3rd
month of its tax year, the election will Shareholders are responsible for
be effective the following year. payment of estimated tax on their
personal returns. The Subchapter S
16
S Corporations
corporation must pay estimated tax DISSOLVING AN S CORPORATION
payments if corporate level taxes apply.
An S corporation is not as expensive or
complicated to dissolve as a C
corporation because gain on the
FILING REQUIREMENTS distribution of assets is taxed once. (If an
S corporation was formerly a C
Subchapter S Corporation Filing corporation or received assets from a C
Requirements: corporation, there may be double
taxation.) To liquidate an S corporation,
Every corporation (except those you must do the following:
exempted by law) must file, regardless of
the amount of income or loss. It must file • Follow any established by-laws
even if it stops conducting business. • Obtain shareholder approval to
Filing ends when totally dissolved. dissolve.
• File a statement of intent to
dissolve with the Secretary of
State.
PRIMARY REQUIRED FORMS • Pay taxes, debts, and creditors.
• Distribute assets of the
For Federal Purposes: corporation to shareholders.
Form 1120S: U.S. Income Tax Return for
an S corporation
Form 1120S Schedule K-1: Shareholder’s
Share of Income, Credit, Deductions
For Kentucky Purposes:
Form 720S: Kentucky S Corporation and
LLET Return
Schedule K-1: Shareholder’s Share of
Income, Credit, Deductions
17
S Corporations
18
Limited Liability Companies
LIMITED LIABILITY COMPANIES
Contents:
Formation........................................................................................... 23
Filing Requirements............................................................................... 24
Required Forms .................................................................................... 24
Dissolution .......................................................................................... 25
19
Limited Liability Companies
LIMITED LIABILITY COMPANY Multi-member LLCs are taxed as
(LLC) partnerships in most cases;
corporation forms must be used if
there are more than 2 of the 4
corporate characteristics. Single
The LLC is a relatively new type of member LLCs are treated as sole
hybrid business structure that is now proprietorships for federal purposes.
available in all states. It is designed State tax treatment can vary.
to provide the limited liability
features of a corporation and the tax
efficiencies and operational flexibility
ADVANTAGES
of a partnership.
• Default classification. An LLC
Often incorrectly called a "limited
with one member is
liability corporation" (instead of
disregarded as an entity
company), it is a hybrid business
separate from its single
entity having certain characteristics
member. An LLC with multi-
of both a corporation and a
members is classified as a
partnership or sole proprietorship
partnership.
(depending on how many owners
• Check-the-box taxation. An LLC
there are). The primary characteristic
can elect to be taxed as a S
an LLC shares with a corporation is
corporation or C corporation,
limited liability, and the primary
providing much flexibility.
characteristic it shares with a
• Limited liability, meaning that
partnership is the availability of pass-
the owners of the LLC, called
through income taxation.
"members," are protected from
The owners are members, and the some or all liability for acts
duration of the LLC is usually and debts of the LLC depending
determined when the organization on state shield laws.
papers are filed. The time limit can • Much less administrative
be continued if desired by a vote of paperwork and record keeping
the members at the time of than a corporation.
expiration. • Pass-through taxation (i.e., no
double taxation), unless the
LLC's must not have more than two of LLC elects to be taxed as a C
the four characteristics that define corporation.
corporations: Limited liability to the • LLCs in some states can be set
extent of assets; continuity of life; up with just one natural person
centralization of management; and involved.
free transferability of ownership • Membership interests of LLCs
interests. can be assigned, and the
economic benefits of those
interests can be separated and
20
Limited Liability Companies
assigned, providing the the LLC's loans, thus making
assignee with the economic the members personally liable
benefits of distributions of for the debt of the LLC.
profits/losses (like a • The management structure of
partnership), without an LLC may be unfamiliar to
transferring the title to the many. Unlike corporations,
membership interest. they are not required to have a
board of directors or officers.
• The LLC form of organization is
relatively new, and as such,
DISADVANTAGES some states do not fully treat
LLCs in the same manner as
• Although there is no statutory corporations for liability
requirement for an operating purposes, instead treating
agreement in most states, them more as a disregarded
members who operate without entity, meaning an individual
one may run into problems. operating a business as an LLC
• It may be more difficult to may in such a case be treated
raise financial capital for an as operating it as a sole
LLC as investors may be more proprietorship, or a group
comfortable investing funds in operating as an LLC may be
the better-understood treated as a general partner,
corporate form. which defeats the purpose of
• Many states, including establishing an LLC in the first
Alabama, California, Kentucky, place, to have limited liability.
New York, Pennsylvania, • The principals of LLCs use
Tennessee, and Texas, levy a many different titles—e.g.,
tax on LLCs. In essence, this member, manager, managing
tax is the "fee" the LLC pays member, managing director,
the state for privilege of doing chief executive officer,
business with the benefit of president, and partner. As
limited liability. The tax can be such, it can be difficult to
an amount based on revenue, determine who actually has the
an amount based on profits, or authority to enter into a
an amount based on the contract on the LLC's behalf.
number of owners or the
amount of capital employed in
the state, or some combination
of those factors, or simply a Exceptions to Limited Liability
flat fee, depending on the law While LLC owners enjoy limited
of the state involved. personal liability for many of their
• Some creditors will require business transactions, this protection
members of up-and-starting is not absolute. This drawback is not
LLCs to personally guarantee
21
Limited Liability Companies
unique to LLCs, however -- the same corporations, partnerships, or other
exceptions apply to corporations. An LLCs.
LLC owner can be held personally
liable if he or she: Membership Interest
• personally and directly injures A member's ownership interest in an
someone LLC is often called a membership
• personally guarantees a bank interest. Membership interests are
loan or a business debt on often divided into standardized units
which the LLC defaults which, in turn, are often called
• fails to deposit taxes withheld shares or units. Unless otherwise
from employees' wages provided for in the operating
• intentionally does something agreement, a member's right to
fraudulent, illegal, or reckless receive distributions or exercise
that causes harm to the member rights over the LLC is
company or to someone else, proportionate to their membership
or interest. Membership interests and
• treats the LLC as an extension member rights are regulated by state
of his or her personal affairs, law.
rather than as a separate legal
entity. Manager
This last exception is the most LLCs may be managed by their
important. If owners don't treat the members in proportion to their
LLC as a separate business, a court membership interests. Many LLC
might decide that the LLC doesn't operating agreements, however,
really exist and find that its owners provide for a manager or board of
are really doing business as managers to oversee or run the day-
individuals who are personally liable to-day operations of the LLC. The
for their acts. managers are elected or appointed by
members and may also be, if so
provided in the operating agreement,
removed by members. A member may
Member also be a manager, often called the
managing member.
LLC members are the owners of the
LLC much as shareholders are the
owners of a corporation or the
partners of a partnership. Like
shareholders, a member's liability to
repay the LLC's obligations is limited
to his or her capital contribution.
Members may be natural persons,
22
Limited Liability Companies
the members and the managers if
HOW TO FORM A LIMITED LIABILITY
COMPANY any.
Forming an LLC requires following a NOTE: State and federal laws may
few simple steps. Here are the steps not agree so legal advice is critical.
you need to take to make your LLC a
legal reality.
1. Choose an available business TAXATION OF LLCs
name that complies with your
state's LLC rules. The IRS treats single member LLCs,
2. File formal paperwork, usually whose single member is an individual,
called articles of organization, estate or trust as sole proprietorships
and pay the filing fee (ranging for tax purposes. This means that the
from about $40 to $800, LLC itself does not pay taxes and does
depending on state). not have to file a return with the IRS.
3. Create an LLC operating Note that a single member can be an
agreement, which sets out the individual, estate, trust or general
rights and responsibilities of partnership.
the LLC members.
Like sole proprietorships and
4. Publish a notice of your intent
partnerships, an LLC is not considered
to form an LLC (required in
a separate entity from its owners for
only a few states).
tax purposes. This means that the LLC
5. Obtain licenses and permits
does not generally pay any income
that may be required for your
taxes itself; instead, the LLC owners
business
pay taxes on their allocated share of
6. Set up a record keeping system
profits (or deduct their share of
business losses) on their personal tax
Articles of Organization
returns. However, some states, such
as Kentucky which has a LLET tax, do
All LLCs must file evidence of their
impose additional tax on LLCs.
existence with the secretary of state
(or some governmental office) of the
state where they choose to be
organized. The Articles of MULTI-MEMBER LLCs
Organization serve this purpose.
The IRS treats multi-member LLCs as
Operating Agreement partnerships for tax purposes. Like
one-member LLCs, multi-member
The Operating Agreement of an LLC is LLCs do not pay taxes on business
the document most important to its income; instead, the LLC owners each
success because it determines, pay taxes on their share of the profits
defines, and apportions the rights of on their personal income tax returns
23
Limited Liability Companies
(with Schedule E attached). Each LLC instance, to cover future expenses or
member's share of profits and losses, expand the business -- you must pay
called a distributive share, should be income tax on that money.
set out in the LLC operating
agreement. If the single member is a corporation
or partnership, the SMLLC's income
Multi-member LLC owners can elect and expenses will be aggregated with
to have their LLC taxed like a the other income and expenses of the
corporation. This may reduce taxes corporation or partnership and
for those LLC owners who need to reported on that entity's tax return.
retain a significant amount of profits
in the company. The principal disadvantage of a
multiple member LLC is that it must
file a partnership tax return and
comply with the sometimes complex
FILING REQUIREMENTS rules of partnership taxation. A
SMLLC, on the other hand, is
SINGLE MEMBER LLCs disregarded for Federal (and most
state) tax purposes.
A single member LLC (SMLLC) is FORMS
simply a limited liability company
that has only one member. Under File Form 1065 with the IRS. Even
current IRS rules, unless the SMLLC though a co-owned LLC does not pay
elects to be treated as a corporation, its own income taxes, it must file
it is disregarded for Federal income Form 1065 with the IRS. This form,
tax purposes. the same one that a partnership files,
is an informational return that the IRS
That means if the only member is an reviews to make sure that LLC
individual, all of the income and members are reporting their income
expenses of a business operated as a correctly. The LLC must also provide
single member limited liability each LLC member with a Schedule K-
company will be reported on a 1, which breaks down each member's
Schedule C attached to the share of the LLC's profits and losses.
individual's Form 1040. The sole In turn, each LLC member reports this
owner of the LLC must report all profit and loss information on his or
profits (or losses) of the LLC on her individual Form 1040, with
Schedule C and submit it with a Schedule E attached.
federal 1040 tax return. As such, this
becomes part of your federal
adjusted gross income, which flows to
the Kentucky return. Even if you PRIMARY REQUIRED FORMS
leave profits in the company's bank
account at the end of the year -- for Federal Tax Forms That a LLC May
Need to File
24
Limited Liability Companies
Form 1040: Individual Income Tax If you are having problems with other
Return partners or members in your business,
Schedule E: Supplemental Income you are in for a much more involved
and Loss process. Dissolving a LLC in this case
Form 1065: U.S. Return of Partnership often requires going to court, unless
Income you can get the required approval to
Form 1065 K-1: Partners’ Share of take this action. If you do, you will go
Income, Deductions, Credits through the steps to dissolve the LLC.
If not, you will need to petition to
your state court system and try to get
Kentucky Tax Forms That a LLC May
Need to File a court order to dissolve the LLC.
Form 725: Kentucky Single Member The business owners of the company
LLC Individually Owned LLET return (a must approve the dissolution of the
single member can be an individual, business. Corporations and LLCs are
estate, trust or general partnership) handled as such. With corporations,
Form 765: Kentucky Partnership and the shareholders must approve this
LLET Return action. With LLCs, the members must
Schedule LLET: Limited Liability grant approval. To comply with the
Entity Tax formalities of a corporation, the
Schedule TCS: Tax Credit Summary board of directors should draft and
approve the resolution to dissolve the
company. The shareholders should
DISSOLVING A LLC then vote on that resolution once
approved by the directors. Both
Depending on the reason that you actions should be documented and
wish to dissolve an LLC, you will need placed in the corporate record book.
to first figure out how much each Even though LLCs are not subject to
individual person's stake in the LLC is, the formalities, documenting the
and also to determine the assets of decision to dissolve the LLC and the
the LLC's. If you are the only person member's approval is recommended.
in your LLC, then there is a number of
steps that you need to finish to
completely dissolve your LLC. STATE REQUIREMENTS
After the shareholders or members
have voted to dissolve the LLC, the
Dissolving an LLC – Procedure appropriate paperwork must be filed
with the state. If the business has
These steps do not need to be qualified to transact business in other
completed in any particular order, states, the appropriate paperwork
but they must all be completed in must also be filed in those states.
order to avoid any type of personal
liability.
25
Limited Liability Companies
The process for filing the certificate
of dissolution varies by state. Some
states require the documents be filed
before notifying creditors and
resolving claims. Other states require
the documents be filed after. Certain
states require tax clearance for the
company before the certificate of
dissolution can be filed. In these
cases, any back taxes owed by the
corporation or LLC must first be paid.
Kentucky’s Secretary of State web
site includes forms for dissolving a
LLC. The limited liability name on
the articles of dissolution must read
exactly as stated in the most recent
articles filed. A fee of $40.00 is
charged. Additional information may
be found on the Secretary of State
website.
26
Partnerships and General Partnerships
PARTNERSHIPS AND
GENERAL PARTNERSHIPS
Contents:
Partnerships
General Information .............................................................................. 28
General Partnerships
Formation........................................................................................... 31
Filing Requirements............................................................................... 32
Required Forms .................................................................................... 38
Dissolution .......................................................................................... 38
27
Partnerships and General Partnerships
PARTNERSHIPS partners. The U.P.A. rules act as "default
rules" that apply if the partners have not
expressly contracted otherwise. Because
A partnership is formed when two or the U.P.A. serves as only a fallback or
more persons agree to carry on a default, businesspeople are left a great
business together. This agreement can be deal of flexibility to draft partnership
written or oral. agreements to address issues that are
relevant to their business.
Partnerships are “flow-through” entities.
Flow-through taxation means that the Although a partnership can be formed
entity does not pay taxes on its income. very informally and without legal aid, it
Instead, the owners of the entity pay tax is preferable to have your lawyer draw
on their "distributive share" of the up an agreement reflecting your
entity's taxable income, even if no funds particular needs, if only to prevent
are distributed by the partnership to the future disagreements.
owners. Like all other business entities,
partnerships are a creation of state law.
Federal tax law permits the owners of The majority of small business
the entity to agree how the income of enterprises that include more than one
the entity will be allocated among them, entity are general partnerships.
but requires that this allocation be an
accurate reflection of the economic
reality of the business arrangement. The
rules governing partnership taxation, for
purposes of the U.S. Federal income tax,
are codified as Subchapter K of Chapter 1
of the U.S. Internal Revenue Code (Title
26 of the United States Code).
There are two types of partnerships,
general and limited, each of which are
covered in this material. In addition, a
limited liability company, composed of
two or more people, is treated very
similarly for tax purposes and liability
issues.
The law governing general partnerships
can be found in the Uniform Partnership
Act. The U.P.A. is a model law that most
states around the country have adopted
with some variances - states often modify
it or fail to update their laws as the
U.P.A. is revised, so there is some
variance among the states.
The laws contained in the U.P.A. are
general guidelines for partnerships and
are usually open to modification by the
28
Partnerships and General Partnerships
GENERAL PARTNERSHIPS
writing in a partnership agreement
You may choose to set up your
the terms in respect to managing the
business as a general partnership. If
business and sharing in its profits.
you do not choose a business form,
under most state laws, a general
While a general partnership can be
partnership is the default partnership
the most simple partnership form, it
form. In other words, if you do not
does have some disadvantages. For
make a selection as to which type of
example, under a general
partnership yours will be, the
partnership, each of the partners is
government will choose for you, and
exposed to unlimited personal
basically, a general partnership is the
liability. This means that each
form the government will choose.
partner is liable for the debts,
obligations and losses of the
Essentially, there are no formalities
partnership. Each partner is also
that are required to be followed to
liable for the actions of the other
form a general partnership. No
partners.
written partnership agreement is
specifically required. Oral partnership
By law, if a general partner makes a
agreements may be enforceable,
decision associated with the
although, as discussed below, it is
partnership’s business, the other
highly recommended that a written
general partners are bound by that
partnership agreement be prepared.
decision. The remaining partners may
also be held liable for the conduct of
With a general partnership, absent a
one of the partners committed in
formal agreement, all partners are
connection with the partnership’s
considered to be equal partners. This
business, e.g., fraud or
means that each partner owns equal
misappropriation of funds.
interest in the partnership, is equally
entitled to participate in operating
Such liability is “joint and several,”
and managing the business and is
which means, for example, that if
entitled to an equal share in the
there are five general partners,
profits of the business. This also
liability will not necessarily be
means that each partner will share
apportioned five ways. For instance,
equally in paying taxes on those
if a judgment is entered against a
profits.
general partnership made up of five
partners, the creditor can go after
Unless there is an agreement that
the personal assets of all five
specifies otherwise, disputes are
partners in an attempt to satisfy the
settled by a majority vote of the
judgment. If only one of the general
partners and changes to the
partners has personal assets, then it
partnership agreement must be by
is possible that one hundred percent
unanimous vote of the partners. It is
of the judgment may be satisfied
especially important to spell out in from that partner’s assets. He or she
will not be able to argue that only
29
Partnerships and General Partnerships
one-fifth of the judgment should be legal formalities. A simple
satisfied from his or her assets. agreement or partnership
deed, either oral or in writing,
A partnership has some is sufficient to create a
characteristics of a separate legal partnership.
entity. Often, a partnership can sue • Enhanced decision making.
other parties in courts and convey or The partners are the owners
buy property. But partnerships retain of the business. Each of them
one very large disadvantage of the has equal right to participate
sole proprietorship: partners are held in the management of the
personally liable for the obligations of business. In case of any
the partnership. conflict, they can sit together
to solve the problem. Since all
As you can see, it is extremely partners participate in the
important to actively select the decision-making process,
appropriate business form for your there is less scope for reckless
partnership. If you do decide on a and hasty decisions.
general partnership, it is crucial that • Flexibility. A partnership firm
you spell out the rights and is a flexible organization. At
responsibilities of the partners in any time, the partners can
order to avoid being subjected to the decide to change the size or
default general partnership rules. nature of the business or area
of its operation. Only the
consent of all the partners is
required.
ADVANTAGES OF A GENERAL • Risk sharing. In a general
PARTNERSHIP partnership all the partners
“share” the business risks.
• Two (or more) heads are • Protection of interest of each
better than one. When you partner. In a general
have a team building and partnership, every partner has
believing in the same an equal say in decision
business, you have a big making and the management
advantage. Diversity in of the business.
training, skills, experience, • Specialization. Since all the
personalities and talents is a partners are owners of the
plus when it is managed in business, they can actively
such a way that people participate in every aspect of
complement each other. business as per their
• Ability to raise capital and specialization, knowledge and
pool resources. More partners experience.
equal more assets available to • Maintenance. Partnerships are
the business. often cheaper and simpler to
• Easy to form. Like sole maintain than corporations.
proprietorships, partnership Partnerships do not have to
businesses can be formed record minutes detailing their
easily without any compulsory actions like corporations.
There are no directors,
30
Partnerships and General Partnerships
officers, etc., just the at any time. Because
partners. of this, there can be
friction and discontent
DISADVANTAGES of a GENERAL among the partners.
PARTNERSHIP Difference of opinion
may lead to the end of
the partnership and
• Unlimited liability. All the business.
the partners are liable
for the debt of the • Limited capital.
firm. They can share Smaller partnerships
the liability among may be limited on
themselves or any one resources to raise
can be asked to pay all capital.
the debts, even from
his personal • Transferring shares. If
properties, depending you are a partner in
on the arrangement any firm, you cannot
made between the transfer your share or
partners. part of the company to
outsiders, without the
• Uncertain life. The consent of other
partnership form has partners. This creates
no legal existence inconvenience for the
separate from its partner who wants to
partners. It comes to leave the firm or sell
an end with death, part of his share to
insolvency, incapacity others.
or the retirement of a
partner. Further, any
FORMING A GENERAL PARTNERSHIP
unsatisfied or
discontented partner
can also give notice at Formation of a partnership can be a
any time for the simple matter. Two people who have
dissolution of the a “handshake agreement” may be
partnership. partners under the law, even if they
do not write anything down or say
• Possible discord. In a another word on the topic. This is not
partnership firm every the best way to form a relationship
partner has an equal where any more than nominal
right to participate in amounts of money are going to be
the management. Also, involved.
every partner can
voice his or her opinion Utilizing a lawyer to form a
or viewpoint before partnership can be more expensive
the management than forming either a sole
regarding any matter proprietorship or a corporation. The
additional expense comes from the
31
Partnerships and General Partnerships
attorney-time necessary to craft a THE PARTNERSHIP AGREEMENT
partnership agreement. Partnership
agreements tend to be less
standardized than other business Although partnership agreements can
entity agreements and thus need be verbal; it is recommended that a
more attention. written partnership agreement be
prepared with the input of all
However, it is well worth the expense partners and the advice of a
to have the clarity that a well-drafted knowledgeable tax attorney.
partnership agreement can bring to
your partnership. A written Some of the matters it should cover
agreement is also a plus with lenders include:
and investors.
Forming partnerships haphazardly is • The nature of the business
very risky financially since, as • The role and authority of each
previously noted, each partner is partner
liable for the partnership liabilities • Proportion of ownership of
and a partner's personal assets can be each partner
seized to pay such liabilities. Coupled • Each partner's liability to
with the fact that each partner has contribute funds
complete and total power to act on • The manner of dissolution
behalf of the partnership, the • The distribution of assets on
potential for risk should be addressed dissolution
up-front. • The resolution of disputes
Imagine, for example, your partner
taking out a loan from a bank in the
partnership's name, which he could
legally do, and then he loses it all in SAMPLE PARTNERSHIP AGREEMENT
a risky deal that was a "sure thing".
Who is liable? The partnership, and The following sample agreement is
that means you are liable. Such just one example illustrating the
occurrences may be avoided through different aspects of a partnership
a properly executed partnership that should be addressed. Actual
agreement. agreement may vary greatly based on
the particular partnership
circumstances.
KENTUCKY REQUIREMENTS
File formal paperwork with the
Secretary of State called Statement PARTNERSHIP AGREEMENT
of Partnership Authority. The current
fee is $40.00. Complete any other THIS PARTNERSHIP AGREEMENT
necessary state and local licenses and ("Agreement") made and effective
permits. this [date], by and between the
following individuals, referred to in
this Agreement as the "Partners": [list
names of partners].
32
Partnerships and General Partnerships
The Partners wish to set forth, in a 4. Capital Accounts.
written agreement, the terms and
conditions by which they will
associate themselves in the A. The Partners shall make an initial
Partnership. investment of capital,
contemporaneously with the
NOW, THEREFORE, in consideration of execution of this Agreement, as
the promises contained in this follows:
Agreement, the Partners affirm in
writing their association as a Partners and Capital
partnership in accordance with the [list partners' names and amounts
following provisions: invested]
1. Name and Place of Business. In addition to each Partner's share of
the profits and losses of the
Partnership, as set forth in Section 5,
The name of the partnership shall be each Partner is entitled to an interest
called [name of partnership] (the in the assets of the Partnership.
"Partnership"). Its principal place of
business shall be [city and state of B. The amount credited to the capital
principal place of business], until account of the Partners at any time
changed by agreement of the shall be such amount as set forth in
Partners, but the Partnership may this Section 4 above, plus the
own property and transact business in Partner's share of the net profits of
any and all other places as may from the Partnership and any additional
time to time be agreed upon by the capital contributions made by the
Partners. Partner and minus the Partner's share
of the losses of the Partnership and
2. Purpose. any distributions to or withdrawals
made by the Partner. For all purposes
of this Agreement, the Partnership
The purpose of the Partnership shall net profits and each Partner's capital
be to [describe business purpose]. account shall be computed in
The Partnership may also engage in accordance with generally accepted
any and every other kind or type of accounting principles, consistently
business, whether or not pertaining applied, and each Partner's capital
to the foregoing, upon which the account, as reflected on the
Partners may at any time or from Partnership federal income tax return
time to time agree. as of the end of any year, shall be
deemed conclusively correct for all
3. Term. purposes, unless an objection in
writing is made by any Partner and
delivered to the accountant or
The Partnership shall commence as of accounting firm preparing the income
the date of this Agreement and shall tax return within one (1) year after
continue until terminated as provided the same has been filed with the
herein. Internal Revenue Service. If an
objection is so filed, the validity of
33
Partnerships and General Partnerships
the objection shall be conclusively 8. Time and Salary.
determined by an independent
certified public accountant or
accounting firm mutually acceptable Until and unless otherwise decided by
to the Partners. unanimous agreement of the
Partners, [list time commitments].
5. Profits and Losses. Each Partner shall nonetheless be
expected to devote such time and
attention to Partnership affairs as
Until modified by mutual consent of shall from time to time be
all the Partners, the profits and losses determined by agreement of the
of the Partnership and all items of Partners. No Partner shall be entitled
income, gain, loss, deduction, or to any salary or to any compensation
credit shall be shared by the Partners for services rendered to the
in the following proportions: Partnership or to another Partner.
Partner and Shares 9. Transfer of Partnership Interests.
[list partners' names and percent
of profits or losses]
A. Restrictions on Transfer. None of
6. Books and Records of Account. the Partners shall sell, assign,
transfer, mortgage, encumber, or
otherwise dispose of the whole or
The Partnership books and records part of that Partner's interest in the
shall be maintained at the principal Partnership, and no purchaser or
office of the Partnership and each other transferee shall have any rights
Partner shall have access to the books in the Partnership as an assignee or
and records at all reasonable times. otherwise with respect to all or any
part of that Partnership interest
7. Future Projects. attempted to be sold, assigned,
transferred, mortgaged, encumbered,
or otherwise disposed of, unless and
The Partners recognize that future to the extent that the remaining
projects for the Partnership depend Partner(s) have given consent to such
upon many factors beyond present sale, assignment, transfer, mortgage,
control, but the Partners wish to set or encumbrance, but only if the
forth in writing and to mutually transferee forthwith assumes and
acknowledge their joint agrees to be bound by the provisions
understanding, intentions, and of this Agreement and to become a
expectations that the relationship Partner for all purposes hereof, in
among the Partners will continue to which event, such transferee shall
flourish in future projects on similar become a substituted partner under
terms and conditions as set forth in this Agreement.
this Agreement, but there shall be no
legal obligations among the Partners B. Transfer Does Not Dissolve
to so continue such relationship in Partnership.
connection with future projects.
No transfer of any interest in the
34
Partnerships and General Partnerships
Partnership, whether or not successors to share in the profits or
permitted under this Agreement, the burden to share in the losses of
shall dissolve the Partnership. No this Partnership, in the same manner
transfer, except as permitted under and to the same extent as the
Subsection 9.A. above, shall entitle deceased or incompetent Partner; the
the transferee, during the right of the successors in interest to
continuance of the Partnership, to continue in this Partnership and all
participate in the management of the such further rights and duties as are
business or affairs of the Partnership, set forth in this Agreement with
to require any information or account respect to the Partners, the same as
of Partnership transactions, or to if the words "or his or her successors
inspect the books of account of the in interest" followed each reference
Partnership; but it shall merely to a Partner; provided, however, that
entitle the transferee to receive the no successor in interest shall be
profits to which the assigning Partner obligated to devote any service to
would otherwise be entitled and, in this Partnership and, provided
case of dissolution of the Partnership, further, that such successors in
to receive the interest of the interest shall be treated as holding a
assigning Partner and to require an passive, rather than active,
account from the date only of the last ownership investment.
account agreed to by the Partners.
B. Payments Upon Retirement or
10. Death, Incompetency, Withdrawal of Partner.
Withdrawal, or Bankruptcy.
(1) Amount of Payments. Upon the
Neither death, incompetency, retirement or withdrawal of a
withdrawal, nor bankruptcy of any of Partner, that Partner or, in the case
the Partners or of any successor in of death or incompetency, that
interest to any Partner shall operate Partner's legal representative shall be
to dissolve this Partnership, but this entitled to receive the amount of the
Partnership shall continue as set forth Partner's capital account (as of the
in Section 3, subject, however, to the end of the fiscal year of the
following terms and conditions: Partnership next preceding the day
on which the retirement or
A. Death or Incompetency. withdrawal occurs) adjusted for the
In the event any Partner dies or is following:
declared incompetent by a court of
competent jurisdiction, the (a) Any additional capital
successors in interest of that Partner contributions made by the Partner
shall succeed to the partnership and any distributions to or
interest of that Partner and shall withdrawals made by the Partner
have the rights, duties, privileges, during the period from the end of the
disabilities, and obligations with preceding fiscal year to the day on
respect to this Partnership, the same which the retirement or withdrawal
as if the successors in interest were occurs;
parties to this Agreement, including,
but not limited to, the right of the (b) The Partner's share of profits and
35
Partnerships and General Partnerships
losses of the Partnership from the Partnership.
end of the preceding fiscal year of
the Partnership to the day on which
the retirement or withdrawal occurs, Except as provided in Section 10.B.(3)
determined in accordance with above, this Partnership may be
generally accepted accounting dissolved only by a unanimous
principles, consistently applied; and agreement of the Partners. Upon
dissolution, the Partners shall
(c) The difference between the proceed with reasonable promptness
Partner's share of the book value of to liquidate the Partnership business
all of the Partnership assets and the and assets and wind-up its business by
fair market value of all Partnership selling all of the Partnership assets,
assets, as determined by a fair paying all Partnership liabilities, and
market value appraisal of all assets. by distributing the balance, if any, to
Unless the retiring or withdrawing the Partners in accordance with their
Partner and the Partnership can agree capital accounts, as computed after
on one appraiser, three (3) appraisers reflecting all losses or gains from such
shall be appointed--one by the liquidation in accordance with each
Partnership, one by the retiring or Partner's share of the net profits and
withdrawing Partner, and one by the losses as determined under Section 5.
two appraisers thus appointed. All
appraisers shall be appointed within 12. Title to Partnership Property.
fifteen (15) days of the date of
retirement or withdrawal. The
average of the three appraisals shall If for purposes of confidentiality, title
be binding on all Partners. to Partnership property is taken in
the name of a nominee or of any
(2) Time of Payments. Subject to a individual Partner, the assets shall be
different agreement among the considered to be owned by the
Partners or successors thereto, the Partnership and all beneficial
amount specified above shall be paid interests shall accrue to the Partners
in cash, in full, but without interest, in the percentages set forth in this
no later than twelve (12) months Agreement.
following the date of the retirement
or withdrawal. 13. Leases.
(3) Alternate Procedure. In lieu of
purchasing the interest of the retiring All leases of Partnership assets shall
or withdrawing Partner as provided in be in writing and on forms approved
subparagraph (1) and (2) above, the by all the Partners.
remaining Partners may elect to
dissolve, liquidate and terminate the 14. Controlling Law.
Partnership. Such election shall be
made, if at all, within thirty (30) days
following receipt of the appraisal This Agreement and the rights of the
referred to above. Partners under this Agreement shall
be governed by the laws of the State
11. Procedure on Dissolution of
36
Partnerships and General Partnerships
of [state of governing law]. all co-owners of the partnership have an
equal right to manage the affairs of the
15. Notices. partnership regardless of the actual
ownership percentage. This means that a
partner owning 90% of a partnership
Any written notice required by this cannot overrule his two partners who
Agreement shall be sufficient if sent own 5% each.
to the Partner or other party to be Problems with management authority can
served by registered or certified mail, be avoided by addressing this issue within
return receipt requested, addressed the partnership agreement. Not
to the Partner or other party at the surprisingly, this is often done when
last known home or office address, in partnerships are formed, and
which event the date of the notice management authority is commonly given
shall be the date of deposit in the to the partner who will be most active in
United States mails, postage prepaid. partnership affairs.
16. General. Due to the law's lack of guidance on
management, there is a great deal of
flexibility in structuring a partnership's
This Agreement contains the entire management. Thus, management
agreement of the Partners with parameters should be put into written
respect to the Partnership and may form through utilizing a competent
be amended only by the written attorney with partnership knowledge.
agreement executed and delivered by One of the traditional reasons people
all of the Partners. preferred the partnership structure is
that there was this flexibility of
17. Binding Upon Heirs. management, as compared with the
rigidity of the corporation. The
development of a hybrid entity, the
This Agreement shall bind each of the Limited Liability Company, has created
Partners and shall inure to the another type of entity to consider when
benefit of (subject to the Sections 9 structuring a business.
and 10) and be binding upon their
respective heirs, executors,
administrators, devisees, legatees, Fiduciary Relationship
successors and assigns. Partners in a partnership are bound
together in a peculiar legal relationship:
IN WITNESS WHEREOF, the Partners fiduciaries. While the law may forgive a
have executed this Agreement the person's transgressions against other legal
date first above written. relationships like marriage, brotherhood,
and parent/child, the law actually cares
about fiduciary duties, and will not look
Management and Control kindly on those partners who do not
honor the fiduciary relationship.
The law is fairly quiet about management As a fiduciary of your partners, you will
of a partnership, saying only that in the owe them your complete loyalty, honesty
absence of an agreement to the contrary, and fairness in all business dealings with
37
Partnerships and General Partnerships
one another. Once you enter the
partnership, you cannot open a PRIMARY REQUIRED FORMS
competing business, deprive the
partnership of your time or skill,
misappropriate partnership property Federal Forms That a General Partnership
(including intellectual property like May Need to File
computer programs), or take money out
of the partnership without proper
procedures being followed.
There is a positive side to the fiduciary • Form 1065: U.S. Return of
relationship. The law recognizes that Partnership Income
people want to choose people with whom • Form 1065 K-1: Partner’s Share
they will share this type of relationship, of Income, Credits, Deductions
so there are rules concerning the • Additional employee &
inclusion of new partners. No person can miscellaneous forms
become a member of the partnership
without the consent of all the partners.
Kentucky Forms That a General
To illustrate, if one of your partners sells
Partnership May Need to File
his partnership interest to another person
who is not a partner, that new person is
NOT a partner with all the rights and
obligations that the law grants and • Form 765-GP General Partnership
imposes, at least not until you agree to Income Return
have the new person as your partner.
• Form 765-K-1 Partner’s Share of
Note, however, that the new person
Income, Credits, Deductions
would have a right to get the profits or
• Schedule A Apportionment and
losses that their ownership interest
Allocation
entitles them to (e.g., a 50% interest
• Additional employee forms
entitles them to 50% of the profits).
TAXING A GENERAL PARTNERSHIP
DISSOLUTION
A partnership does not file an income tax
return, although it does file an
information return. A partnership is a tax Partnerships, unlike corporations, do not
reporting entity, not a taxpaying entity. have perpetual existence. Partnerships
The total income of the partnership is generally end upon the occurrence of the
determined and each partner's share of following events: the death, retirement,
the income is shown on a Schedule K-1. withdrawal, expulsion, incapacity, or
bankruptcy of a partner; court ordered
Each partner is taxed on his or her share dissolution of the partnership; or the
of the profits. This is reflected on the expiration of any date set as the
partner’s individual income tax return. termination date in the partnership
Partners in a partnership pay income tax agreement.
on their business activities and other
income at the applicable personal tax
rate for the year.
38
Partnerships and General Partnerships
A well-crafted partnership agreement
should include the proper procedure for
dissolving the partnership. Some issues
addressed in the agreement may include:
• Public and governmental notice as required
by law
• Payment of liabilities
• Return of capital investments as
originally invested by the partners
• Distribution of remaining assets and
profits among partners
39
Partnerships and General Partnerships
40
Limited Partnerships
LIMITED PARTNERSHIPS
Contents:
Formation........................................................................................... 43
Filing Requirements............................................................................... 44
Required Forms .................................................................................... 44
Dissolution .......................................................................................... 44
41
Limited Partnerships
LIMITED PARTNERSHIPS The general partner also owes the
limited partnership at least the same
level of fiduciary loyalty that a general
A special type of partnership is the partner in a general partnership owes,
limited partnership. This type of perhaps more. Limited partners in a
partnership is found in almost all of the limited partnership, however, generally
fifty states. Each state has specific do not owe fiduciary duties to one
statutes regulating limited partnerships. another.
Although it is based on the structure of
the general partnership, the limited Limited partners contribute capital to
partnership has some very significant the partnership but do not participate in
differences. the daily operations of the company.
A limited partnership is a business entity The limited partners are essentially
comprised of two or more partners who financial backers. Their interest in the
operate or manage a business together. partnership is financial only. They put up
In every limited partnership (LP), there the capital to operate the business of the
are two types of partners-general partnership and share in the profits of
partners and limited partners. the partnership. Their liability is limited
to the amount of their contribution of
capital to the partnership.
General partners control the company's
day-to-day operations and take on the
legal debts and obligations of the Limited partners do have the right, as
business. In other words, they run the investors, to access and review the
business. Because they are responsible records of the partnership. However, in
for any debts or lawsuits incurred by the order for the limited partnership form of
company, general partners often form business to be legally effective, it is
corporations or LLCs to protect crucial that the limited partners stay out
themselves from liability. To further of the day-to-day operations of the
reduce exposure to personal liability, a business and the decision-making
limited partnership may be formed with process. As an added benefit, they are
a corporation or corporations as the also shielded from company debts and
general partner(s). Under this scenario, other liabilities. Limited partnerships are
the corporation(s) would bear the a great choice for individuals who lack
responsibilities and liabilities of the the time or expertise to run a business
general partner and the individual but would like to invest and share in the
shareholders would under most profits.
circumstances be afforded protection In recent years, the limited partnership
from personal liability. or LP has become an increasingly popular
choice for businesses-especially those
As previously mentioned, the limited involved in real estate or other
partnership must have at least one investment ventures. The main reason is
general partner who is personally liable that unlike general partnerships, limited
for the debts of the partnership debt. partnerships (as the name suggests) have
The general partner controls the limited the ability to limit both the liability risk
partnership with the same scope of and the business involvement of certain
powers as a general partner would have partners known as "limited partners."
in a standard general partnership. This feature is particularly useful for
42
Limited Partnerships
attracting investment partners who'd like having to go through a multi-step
to participate in the profits of the corporate ownership process as
business but not necessarily its risks or corporations necessarily involve
daily operations. both shareholders and a corporate
The limited liability partnership is board.
attractive to entrepreneurs because they
can retain control of the business by
acting as the general partner, while still
being able to offer limited partner * It is important to know that the limited
investors the tax benefits of a tax flow- partner's protection against personal
through entity. However, because liability can be lost in cases where a
Limited Liability Companies now offer limited partner is found to participate in
the same benefits without requiring a the control of the business beyond the
general partner, limited partnerships limited role allowed to limited partners.
may be declining in popularity. What is the boundary of the limited role
allowed to limited partners? How much
participation is too much? This is one of
those questions that can only be
ADVANTAGES OF A LIMITED answered based on the facts on a case-
PARTNERSHIP by-case basis.
• The primary advantage of a
limited liability partnership over a
general partnership is that each DISADVANTAGES OF A LIMITED
partner is potentially liable for PARTNERSHIP
only the amount of money put
into the partnership. * • General partners assume personal
• Easier to attract investors since liability unless the partners form an
the only liability for limited LLC, corporation or other company
partners is the capital they invest with limited liability protection.
in the business. • There are more filings,
• Allows general partners to focus formalities, and state requirements
their efforts on running the with limited partnerships.
business.
• This arrangement allows for
general partners to use their
expertise, make key decisions, FORMATION
and manage the business. To form a limited partnership, there are
• Limited partners can leave the strict and rigid statutory rules which
business or be replaced, without must be followed, otherwise the attempt
the need for the limited to form the limited partnership fails and
partnership to be dissolved. a general partnership usually results
• Limited liability partnerships also instead.
offer an advantage over the
corporate form by allowing Formation and maintenance costs are
partners to directly own and still higher than those of corporations for
manage business, rather than the same reasons that the general
partnership costs are higher.
43
Limited Partnerships
KENTUCKY REQUIREMENTS • Form 765 Partnership Income
A certificate must be filed with the Return
Kentucky Secretary of State. This form is • Form 765-K-1 Partner’s Share of
identified by the title “ Certificate of Income, Credits, Deductions
Limited Partnership”. The filing • Schedule A Apportionment and
certificate contains pertinent Allocation
information about the partnership. • Additional employee forms
Dissolution of a Limited Partnership
Taxing Limited Partnerships
Dissolution of a business partnership can
be caused by conflicts or irreparable
For tax purposes, a limited partnership differences between one or more of the
typically works like a general partners. Additionally, an unsuccessful
partnership. Profits are "passed through" partnership may influence a partner's
to the partners who report the income on decision to leave along with a host of
their personal tax returns. The total other possible reasons such as health,
income of the partnership is determined other commitments, passing away, loss of
and each partner's share of the income is interest, dispute etc.
shown on a Schedule K-1.
Each partner is then taxed on his or her The death, retirement, withdrawal, or
share of the profits. This is reflected on bankruptcy of a limited partner does not
the partner’s individual income tax end the existence of the limited
return. Partners in a partnership pay partnership, but instead only requires an
income tax on their business activities amendment to the limited partnership's
and other income at the applicable agreement. The limited partnership
personal tax rate for the year. interest may be transferred to another
person without the consent of the other
limited or general partners. But the
limited partner will still lack some rights
PRIMARY REQUIRED FORMS unless there is approval by the other
partners. The death, retirement,
Federal Forms That a Limited Partnership withdrawal, or bankruptcy of the general
May Need to File partner will dissolve the partnership.
Most partnership laws within the United
• Form 1065: U.S. Return of
States require certain actions to be taken
Partnership Income
before a partnership is considered ended.
• Form 1065 K-1: Partner’s Share of
Since partnerships are not incredibly
Income, Credits, Deductions
formal types of businesses, the amount
• Additional employee & of paperwork that needs to be filed can
miscellaneous forms be minimal if the ending of the
partnership, and its terms are agreed
upon by the partners. The required
Kentucky Forms That a Limited
actions may include:
Partnership May Need to File
• Proper public and governmental
notice as required by law
44
Limited Partnerships
• Pay all creditors what they are
owed
• Return Capital investments as
originally invested by the partners
• Distribute remaining assets and
profits among partners
• Completing required Secretary of
State form
45
Limited Partnerships
46
Limited Liability Partnerships
LIMITED LIABILITY PARTNERSHIPS
Contents:
Formation........................................................................................... 49
Filing Requirements............................................................................... 50
Required Forms .................................................................................... 50
Dissolution .......................................................................................... 50
47
Limited Liability Partnerships
LIMITED LIABILITY organizes itself (also under the laws of
the various state charters) and hires
PARTNERSHIPS corporate officers who then have as
"corporate" individuals the legal
A limited liability partnership (LLP)
responsibility to manage the corporation
resembles a general partnership, but
in the corporation's best interest. An LLP
with the added liability protections of a
also contains a different level of tax
corporation or limited liability company.
liability than a corporation.
An LLP is a partnership in which some or
all partners (depending on the
Any partner without the other may bind
jurisdiction) have limited liability. It
the LLP. Money and property contributed
therefore exhibits elements of both
to the LLP becomes owned by the
partnerships and corporations.
partnership unless otherwise stated and
the contributor is not entitled to its
In an LLP, one partner is not responsible
return except as stated in the
or liable for another partner's misconduct
partnership agreements.
or negligence. This is an important
difference from that of a limited
A large number of states only extend
partnership. In most jurisdictions,
liability protection against negligence
including Kentucky, LLPs must have at
claims. This means that a partner can be
least one general partner with unlimited
personally liable for other claims, such as
liability.
contract claims. Profits from the limited
liability partnership are distributed
In general, this business form is available
evenly among the partners. This is for tax
only to those professions that are
purposes, as the partnership is not taxed
precluded by statute from forming as a
separately.
limited liability company, e.g.,
attorneys, accountants or architects.
Unless otherwise provided in the
These professionals often prefer LLPs to
partnership agreement, no one can
general partnerships, corporations, or
become a member of the partnership
LLCs because they don't want to be
without the consent of all partners.
personally liable for another partner's
However, a partner may assign his share
problems -- particularly those involving
of the profits and losses and right to
malpractice claims.
receive distributions.
An LLP protects each partner from debts
against the partnership arising from
professional malpractice lawsuits against
another partner. A partner who loses a ADVANTANGES OF A LIMITED LIABILITY
malpractice suit for his own mistakes, PARTNERSHIP
however, doesn't escape liability.
• Easy to establish
Unlike corporate shareholders, partners • LLPs allow for pass-through
in an LLP have the right to manage the taxation
business directly. As opposed to that, • Separate legal entity
corporate shareholders have to elect a • All partners are not held
board of directors under the laws of personally responsible for the
various state charters. The board
48
Limited Liability Partnerships
debts and liabilities of the registration fee and include the phrase
business Registered Limited Liability Partnership
• Partners have more flexibility in or LLP in their business title.
structuring the management with
less formal requirements and Kentucky Requirements
annual paperwork
• Easier conversion from a general A certificate must be filed with the
partnership to an LLP than to a Kentucky Secretary of State. This form is
LLC or corporation identified by the title “ Certificate of
Limited Partnership”. The filing
certificate contains pertinent
information about the partnership and an
DISADVANTAGES OF A LIMITED area to mark “Limited Liability
LIABILITY PARTNERSHIP Partnership”.
• LLP may be limited in raising Taxing a Limited Liability Partnership
funds.
• Any act of the partner without the
With a few exceptions, unless an LLP
other may bind the LLP.
elects to be taxed as a corporation, its
• Under some cases, liability may
income is not taxed to the LLP but is
extend to personal assets of
instead "passed-through" to the partners
partners.
and taxed to them at their individual tax
• No separation of management
rates in the same manner as the income
from owners
of a general partnership is taxed.
Taxwise, a limited partnership’s profits
and losses are allocated to limited
FORMING A LIMITED LIABILITY partners according to the terms of the
PARTNERSHIP partnership agreement. In the absence of
any special allocations, limited partners
Creating and forming a limited liability are allocated profits and losses according
partnership is done at the state level. to the relative value of their capital
Each state has its own rules, but in contributions. Typically, the business
general you must pay a fee and file pays the general partner a management
papers with the state, usually a fee that is netted against partnership
"Certificate of Limited Partnership" or income, so limited partners receive only
"Certificate of Limited Liability a share after the general partner has
Partnership." This document is similar to been fully compensated for services on
the articles of incorporation filed by a behalf of the business, where applicable.
corporation and includes information
about the general and limited partners.
An LLP can be organized to combine
Some states require proof that the several of the best features of the other
partnership has enough assets to cover forms of business organization. An LLP
any claims and has obtained adequate provides its partners with limited
liability insurance. In all states, the personal liability for the obligations of
limited liability partnership must file a the business.
49
Limited Liability Partnerships
In most cases, treatment of an LLP as a New York City unincorporated business
partnership for tax purposes will be the tax).
desired result. When an LLP is treated for
tax purposes as a partnership it is called PRIMARY REQUIRED FORMS
a "pass-through" entity. This is because
the income or loss of the LLP's business is Federal Forms That a Limited
not taxed to the LLP but is instead Partnership May Need to File
allocated among the partners (either in
proportion to their ownership interest in • Form 1065: U.S. Return of
the LLP or in other proportions agreed to Partnership Income
by them) and then combined with the • Form 1065 K-1: Partner’s Share of
partners' other income and taxed to them Income, Credits, Deductions
separately on their individual income tax
• Additional employee &
returns.
miscellaneous forms
On the other hand, if an LLP elects to be
treated as a corporation for tax Kentucky Forms That a Limited
purposes, and not as an S corporation, Partnership May Need to File
the income of the LLP is subject to what
is sometimes called the corporate • Form 765 Partnership Income
"double-tax." The income is taxed once Return
directly to the LLP and then taxed again
• Form 765-K-1 Partner’s Share of
to the partners as part of their individual
Income, Credits, Deductions
income when they receive distributions
• Schedule A Apportionment and
from the profits of the LLP.
Allocation
• Additional employee forms
In the absence of an election to the
contrary, multi-member limited liability
companies (LLCs), limited liability
Dissolving a Limited Liability
partnerships (LLPs) and certain multi-
Partnership
member trusts are treated as
partnerships for United States federal
income tax purposes. Certain non-U.S. Ending Limited Liability Partnerships
entities may also be eligible for works the same as ending other type
treatment as partnerships. Individual partnerships. Partnerships generally end
states of the United States do not upon the occurrence of the following
universally accord "flow-through" events: the death, retirement,
taxation to partnerships, and some withdrawal, expulsion, incapacity, or
distinguish among different kinds of bankruptcy of a partner; court ordered
entities that are treated the same under dissolution of the partnership; or the
federal tax principles (e.g. Texas taxes expiration of any date set as the
LLCs as corporations, while according termination date in the partnership
flow-through treatment to partnerships). agreement.
Local jurisdictions may also impose their
own taxes on entities taxed as A well-crafted partnership agreement
partnerships at the federal level (e.g., should include the proper procedure for
dissolving the partnership. In general,
50
Limited Liability Partnerships
follow the same steps as discussed
previously for other type partnerships.
Once the business is dissolved, file a
statement of dissolution, which lets third
parties know that neither partner has any
rights to enter into binding transactions
unless it’s to end the business. It is
usually assumed that all third parties
know of the dissolution after ninety days
of filing the statement of dissolution.
51
Limited Liability Partnerships
52
Qualified Investment Partnerships
QUALIFIED INVESTMENT PARTNERSHIPS
QUALIFIED INVESTMENT PARTNERSHIPS
In 2002, another type of partnership was established via KRS 141.206 called a Qualified
Investment Partnership. These entities are exempt from Kentucky tax and are for
nonresident individuals.
KRS 141.206 states, in part:
KRS 141.206 (12) (a) Nonresident individuals shall not be taxable on investment income
distributed by a qualified investment partnership. For purposes of this subsection, a
"qualified investment partnership" means a pass-through entity that, during the taxable
year, holds only investments that produce income that would not be taxable to a
nonresident individual if held or owned individually.
(b) A qualified investment partnership shall be subject to all other provisions relating to a
pass-through entity under this section and shall not be subject to the tax imposed under
KRS 141.040 or 141.0401.
Income distributed from a qualified investment partnership to a nonresident partner is not
subject to Kentucky tax. “Qualified investment partnership” is defined to mean a
partnership formed to hold only investments that produce income that would not be
taxable to the nonresident individual if held or owned individually.
53
Qualified Investment Partnerships
54
Non Profit Organizations
NON PROFIT ORGANIZATIONS
Contents:
Formation........................................................................................... 57
Filing Requirements............................................................................... 59
Dissolution .......................................................................................... 61
55
Non Profit Organizations
NON PROFIT CORPORATIONS business that generates a profit or
hold investments, however, the profit
must be used exclusively for attaining
A non-profit organization, often the organizations goals. A nonprofit
characterized as a 501 (C) entity is generally exempt from
organization, is a group organized for taxation, with certain exceptions.
purposes other than generating profit
and in which no part of the
organization's income is distributed to
its members, directors, or officers. 501 (C) ORGANIZATIONS
Non-profit corporations are often
termed "non-stock corporations." 501(c) is a provision of the United
They can take the form of a States Internal Revenue Code (26
corporation, an individual enterprise U.S.C. § 501(c)), listing 26 types of
(for example, individual charitable non-profit organizations exempt from
contributions), unincorporated some federal income taxes. Sections
association, partnership, foundation, 503 through 505 list the requirements
etc. for attaining such exemptions. Many
states reference Section 501(c) for
Non-profit organizations must be definitions of organizations exempt
designated as nonprofit when created from state taxation as well.
and may only pursue purposes
permitted by statutes for non-profit 501 (c)(3) organizations are the most
organizations. Non-profit common and include many familiar
organizations include churches, public type organizations such as religious,
schools, public charities, public educational, charitable, scientific,
clinics and hospitals, political literary, those that foster national or
organizations, legal aid societies, international amateur sports
volunteer services organizations, competitions, prevention of cruelty to
labor unions, professional children or animals, etc.
associations, research institutes,
museums, and some governmental
A comprehensive list of 501 (c)
agencies.
organizations may be found at the
end of this section.
A nonprofit organization does not
simply refer to an organization that
cannot generate a profit, it means
that it can only earn a profit at the
entity level and may not be passed on
to its board of directors, officers or
members. Any profit realized must
be used for a charitable or public
purpose. A nonprofit entity may
legally and ethically run a trade or
56
Non Profit Organizations
ADVANTAGES of NON PROFIT non-profit organizations, filing with
the state is required. The cost of
ORGANIZATIONS annual reporting requirements is also
a disadvantage.
Tax exemption is one of the principal
In creating non-profits, personal
benefits for non-profit organizations.
control is limited. In some cases the
Tax exemption enables the
organization’s directors are the only
organization to operate without
people allowed to elect officers and
federal (and perhaps state) income
to determine corporate policies. Non-
tax. This benefit often enhances the
profits are subject to federal and
organization’s ability to accumulate
state laws and regulations along with
income and assets and can therefore
its own articles of incorporation and
be more productive over the long-
bylaws, which again limits personal
term.
control over the non-profit entity.
A second primary benefit to a tax-
Because a non-profit organization is
exempt entity is that charitable
dedicated to charity or the public, its
contributions to a 501(c)(3)
finances are also open to inspection
organization are tax-deductible. If an
by the public. The public may obtain
organization has obtained IRC Section
copies of the non-profit
501(c)(3) tax exempt status, an
organization’s expense and salary
individual or company’s charitable
reports as well as state and federal
contributions to this entity are tax-
filings.
deductible.
In addition, certain detailed
documents including financial
records, articles of incorporation,
DISADVANTAGES of NON PROFIT
bylaws and annual reports, as
ORGANIZATIONS required by the state in which it is
incorporated, must be prepared in a
specific manner and filed by certain
The cost of a non-profit organization deadlines.
is one of its principal disadvantage.
Because a non-profit is a legal entity,
the use of an attorney or accountant
is necessary as the rules and FORMING A NON PROFIT
regulations are complex. While tax
exemption is one of the advantages of ORGANIZATION
qualified non-profits, the fee of
incorporation and application for Forming a nonprofit corporation is
exemption is a disadvantage. These much like creating a regular
costs are not the same for every corporation, except that nonprofits
entity. With the corporate form of have to take additional steps, such as
57
Non Profit Organizations
applying for tax-exempt status with Form a Board of Directors. Forming a
the IRS and their state tax division. board requires careful thought and
They must also choose an available extensive recruitment efforts. Each
business name that meets the state has regulations that determine
requirements of state law. the minimum size of the board,
typically three, but the optimum
This is the basic process: number of people who sit on the
board should be determined by the
1. File formal paperwork, usually needs of the organization.
called articles of
incorporation. File Articles of Incorporation. Articles
2. Apply for federal and state tax of Incorporation are official
exemptions. statements of creation of an
3. Create corporate bylaws, organization filed with the
which set out the operating appropriate state agency. They are
rules for the nonprofit important to protect both board and
corporation. staff from legal liabilities incurred by
4. Appoint the initial directors. the organization, making the
(In some states you must corporation the holder of debts and
choose your initial directors liabilities, not the individuals and
before you file your articles, officers who work for the
because you must list their organization. The specific
names in the document.) requirements governing how to
5. Hold the first meeting of the incorporate are determined by each
board of directors. state.
6. Obtain a federal employer
identification number (EIN). Draft bylaws. Bylaws are simply the
7. Obtain other licenses and "rules" of how the organization
permits that may be required operates. Although bylaws are not
for your corporation. required to file for 501(c)(3) status,
8. Filing required documents on they will help you in governing your
the state level. organization. Bylaws should be drafted
with the help of an attorney and
Completing those steps involve approved by the board.
several processes. Some of them are
discussed below. Develop a budget. Creating a budget is
often one of the most challenging
First establish the purpose of the tasks when creating a nonprofit
organization. In practical terms this organization. A budget is the
works like a mission statement. As a expression, in financial terms, of the
non-profit organization, you exist to plan of operation designed to achieve
accomplish your mission, which should the objectives of an organization.
be crafted based upon your purpose,
services and values.
58
Non Profit Organizations
Develop a record-keeping system. exemption from income, sales, and
Legally, you must save all Board property taxes.
documents including minutes and
financial statements. It is necessary to Fulfill charitable solicitation law
preserve your important corporate requirements. If your organization’s
documents, including board meeting plans include fundraising, be aware
minutes, bylaws, Articles of that many states and few local
Incorporation, financial reports, and jurisdictions regulate organizations
other official records. that solicit funds within that state,
county, or city. Usually compliance
Develop an accounting system. If your involves obtaining a permit or license
board does not include someone with and then filing an annual report and
a financial or accounting background, financial statement.
it is best to work with an accountant
familiar with non-profit organizations. Apply for a nonprofit mailing permit.
Nonprofits are accountable to the The federal government provides
public, their funders, and, in some further subsidies for nonprofits with
instances, government granting reduced postage rates on bulk
bodies, and it is vital to establish a mailings. While first-class postage
system of controls (checks and rates for nonprofits remain the same
balances) when establishing the as those for the for-profit sector,
organization’s accounting practices. second- and third-class rates are
substantially less when nonprofits mail
File for 501(c)(3) status. To apply for to a large number of members or
recognition of tax-exempt, public constituencies.
charity status, obtain Form 1023
(application) and Publication 557
(detailed instructions) from the IRS.
Apply for a federal employer
identification number. Regardless of
whether or not you have employees,
nonprofits are required to obtain a
federal Employer Identification
Number (EIN) — also referred to as the
federal ID number. Available from the
IRS, this number is used to identify
the organization when tax documents
are filed much like an individual’s
Social Security number.
File for state and local tax exemption.
In accordance with state, county, and
municipal law, you may apply for
59
Non Profit Organizations
REQUIRED FILINGS FOR KENTUCKY 2) Create a plan for distributing any
PURPOSES assets and paying any liabilities.
3) Approve Dissolution plan. Once the
Kentucky requires non profit
resolution of dissolution has been
organization to file a copy of form
adopted and the plan of distribution
990-T with the Attorney General’s
created, it must be submitted for
office. In addition, Kentucky
approval to the organization’s
requires an annual report to be filed
with the Secretary of State. members or directors.
4) File dissolution with Kentucky
It is merely an update of company
Secretary of State.
information, including members,
managers, partners, and officers. It Please note: Filing this form with
requires no disclosure of financial the Office of the Secretary of State
information. It does require does not ensure the dissolution of the
businesses to inform the state on the business entity is complete.
names and addresses of officers, and Additionally, being administratively
of the address of the entity that is dissolved by the Secretary of State
doing business in Kentucky. does not exempt the entity from any
filing requirements with the Kentucky
Department of Revenue.
5) After dissolution, the organization
must notify the IRS that it has
DISSOLVING A NON PROFIT
dissolved and will no longer be filing
ORGANIZATION
annual returns. The organization may
utilize Form 966, Corporate
Many organizations do not realize that Dissolution or Liquidation or a
there is a formal process for detailed letter of explanation.
dissolving a nonprofit organization. If
you are considering dissolution or 6) Finally, the dissolved corporation
have made the decision to dissolve, it must continue its corporate existence
is important to follow the proper for the purpose of winding up its
procedures. affairs by: (1) collecting its assets; (2)
selling or transferring assets not
Procedures involved include the provided for in the plan of
following: distribution; (3) paying all debts and
liabilities; and (4) doing all other acts
1) Adopt a resolution. The incident to liquidation of its affairs.
organization’s board must adopt a
resolution that the corporation be
dissolved.
60
Non Profit Organizations
501 (C) ORGANIZATIONS • 501(c)(10) — Domestic
Fraternal Societies and
Associations
According to IRS Publication 557, in
• 501(c)(11) — Teachers'
the Organization Reference Chart
Retirement Fund Associations
section, the following is an exact list
• 501(c)(12) — Benevolent Life
of 501(c) organization types and their
corresponding descriptions. Insurance Associations, Mutual
Ditch or Irrigation Companies,
Mutual or Cooperative
• 501(c)(1) — Corporations
Telephone Companies, etc.
Organized Under Act of
• 501(c)(13) — Cemetery
Congress (including Federal
Companies
Credit Unions)
• 501(c)(14) — State-Chartered
• 501(c)(2) — Title Holding
Credit Unions, Mutual Reserve
Corporation for Exempt
Funds
Organization
• 501(c)(15) — Mutual Insurance
• 501(c)(3) — Religious,
Companies or Associations
Educational, Charitable,
• 501(c)(16) — Cooperative
Scientific, Literary, Testing for
Organizations to Finance Crop
Public Safety, to Foster
Operations
National or International
• 501(c)(17) — Supplemental
Amateur Sports Competition,
Unemployment Benefit Trusts
or Prevention of Cruelty to
• 501(c)(18) — Employee Funded
Children or Animals
Pension Trust (created before
Organizations
June 25, 1959)
• 501(c)(4) — Civic Leagues,
• 501(c)(19) — Post or
Social Welfare Organizations,
Organization of Past or Present
and Local Associations of
Members of the Armed Forces
Employees
• 501(c)(21) — Black lung Benefit
• 501(c)(5) — Labor, Agricultural,
Trusts
and Horticultural Organizations
• 501(c)(22) — Withdrawal
• 501(c)(6) — Business Leagues,
Liability Payment Fund
Chambers of Commerce, Real
• 501(c)(23) — Veterans
Estate Boards, etc.
Organization (created before
• 501(c)(7) — Social and
1880)
Recreational Clubs
• 501(c)(25) — Title Holding
• 501(c)(8) — Fraternal
Corporations or Trusts with
Beneficiary Societies and
Multiple Parents
Associations
• 501(c)(26) — State-Sponsored
• 501(c)(9) — Voluntary
Organization Providing Health
Employees Beneficiary
Coverage for High-Risk
Associations
Individuals
61
Non Profit Organizations
• 501(c)(27) — State-Sponsored
Workers' Compensation
Reinsurance Organization
• 501(c)(28) — National Railroad
Retirement Investment Trust
62
Real Estate Investment Trusts
REAL ESTATE INVESTMENT TRUSTS
Contents:
Advantages ......................................................................................... 64
Disadvantages ...................................................................................... 65
Taxation ............................................................................................ 65
63
Real Estate Investment Trusts
REAL ESTATE INVESTMENT financial wherewithal to undertake
TRUSTS direct real estate investment.
The Internal Revenue Code lists the
Real estate investment trusts, known as conditions a company must meet to
REITs, are entities that invest in different qualify as a REIT. For example, the
kinds of real estate or real estate related company must pay 90% of its taxable
assets, including shopping centers, office income, in the form of dividends, to
buildings, hotels, and mortgages secured shareholders every year. It must also
by real estate. The U.S. Master Tax invest at least 75% of its total assets in
Guide describes REITs as any corporation, real estate and generate 75% or more of
trust or association that acts as an its gross income from investments in or
investment agent specializing in real mortgages on real property.
estate and real estate mortgages.
Individuals can invest in REITs either by
There are basically three types of REITS: purchasing their shares directly on an
open exchange or by investing in a
• Equity REITS, the mutual fund that specializes in public
most common type of REIT, real estate. Among other things, REITs
invest in or own real estate invest in shopping malls, office buildings,
and make money for apartments, warehouses and hotels.
investors from the rents they
collect;
• Mortgage REITS lend ADVANTAGES OF REITs
money to owners and
developers or invest in Diversified investments. REITs include
financial instruments tangible assets, such as land and
secured by mortgages on buildings, and often sign their tenants to
real estate; and long-term lease contracts. Because of
• Hybrid REITS are a this, REITs tend to be some of the most
combination of equity and stable companies on the market.
mortgage REITS.
Professional management. REITs allow
Congress created REITs in the U.S. in the investor the opportunity to have
1960 as a way to make investment in properties managed by a professional
large-scale, income-producing real real estate team that knows the industry,
estate accessible to all investors in the understands the business and can take
same way they typically invest advantage of opportunities thanks to its
otherwise – through the purchase and ability to raise funds from the capital
sale of liquid securities. Prior to the markets.
creation of listed real estate equities,
access to the investment returns of REITs can significantly limit personal risk.
commercial real estate equity as a core How? If an investor wanted to acquire
asset was available only to institutions real estate, it is likely he will take on
and wealthy individuals having the debt by borrowing money from friends,
family, or a bank. Often, he will be
required to personally guarantee the
64
Real Estate Investment Trusts
funds. Purchasing a REIT, on the other
hand, can be done with only a few
hundred dollars as share prices are often
as low, if not lower, than equities.
DISADVANTAGES OF REITs
Because they can only reinvest up to 10%
of their annual profits back into their
core business lines each year, most REITs
tend to grow at a slower rate than the
average stock on Wall Street.
Dividend payments are not guaranteed
and the real estate market is prone to
cyclical downturns.
Since they already enjoy a unique tax-
advantaged status versus other firms
(more specifically, they are allowed to
deduct the dividends they pay out from
their taxable income), from an investor's
perspective, roughly 2/3 of all dividends
paid by REITs do not qualify for the new
lower 15% tax rate. By contrast, the vast
majority dividends paid by non-REITs are
taxed at this new low rate.
TAXATION OF REITs
REITs may escape corporation taxation
because, unlike ordinary corporations,
they are entitled to claim a deduction for
dividends paid to shareholders against
their ordinary income and capital gains.
An entity qualifies as a REIT if it makes
an election to be treated as such by filing
a tax return on Form 1120-REIT and
meets certain requirements as to
ownership and organization, source of
income, investment of assets, and
distribution of income to shareholders.
More information on REITs may be found
in the U.S. Master Tax Guide in Section
2326 through Section 2340.
65
Real Estate Investment Trusts
66
Disregarded Entities
DISREGARDED ENTITIES
Contents:
Defined.............................................................................................. 68
Options .............................................................................................. 68
67
Disregarded Entities
DISREGARDED ENTITIES
purposes. The assets, liabilities and
When choosing to form a business
operations of the single-member LLC
entity, being formed as a disregarded
are treated as assets, liabilities and
entity is not an option. That is
operations of its owner.
because the term “disregarded”
refers to the tax treatment rather
than the legal form of the entity. A A single owner eligible entity can
disregarded entity is a business entity elect, via the check-the-box rules, to
that is disregarded as an entity be taxed as a corporation. At that
separate from its business owner for point, there is also an option to elect
federal tax purposes. S-corporation status.
Businesses are organized under state When forming a business entity, your
statutes, and no state recognizes a entity options are:
"disregarded entity" as a business
type. Most businesses, when they are • Sole proprietorship
set up, choose to be organized as • Single-member limited liability
separate entities from their owners company
for liability reasons; if the business is • Multi-member limited liability
sued, in most instances the owner company (partnership)
(and assets) cannot be brought into • General Partnership
the suit. • C-Corporation
• S-Corporation
A disregarded entity is not considered
separate from its owner. This allows The following information discusses
the business to be taxed on the these various entities, how they are
business owner's income tax return. treated for tax purposes, and if they
qualify to be treated as disregarded
The most common disregarded entity entities.
is a single-member limited liability
company (LLC), owned by an Sole proprietorship - in which you and
individual, which is taxed as a sole the business are the same entity. The
proprietorship, unless it elects to be sole proprietor is taxed on Schedule C,
taxed as a corporation under the but there is no separate business
"check-the-box" rules. (TR 301.7701- entity to provide liability protection
3) for you if the business can't pay its
bills or gets sued.
Under the entity default classification
system, single-member entities (e.g., A sole proprietorship is NOT a
limited liability companies ("LLCs")) disregarded entity.
are disregarded for federal tax
68
Disregarded Entities
Single-member Limited Liability corporations making an election to be
Company (LLC) - a separate entity for taxed as such.
liability purposes, registered with the
secretary of state, and the LLC
activity of individuals is reported on
Schedule C.
A single-member LLC IS a disregarded
entity.
Multiple-member LLCs – an entity that
registers with the secretary of state
and has liability protection, but is
treated as a partnership.
Multiple-member LLCs are NOT
disregarded entities.
Partnership - as noted above, is not a
disregarded entity, including general
partnerships, limited partnerships or
limited liability partnerships.
Corporation - a separate legal entity
from the owners, providing liability
protection, and pays taxes on Form
1120, so a corporation is NOT a
disregarded entity.
Subchapter S corporation - an entity
that has elected to be taxed as an S
corporation, may be a corporation or
other entity that has elected
corporation status under the check-
the-box rules and elected to be taxed
as an S corporation. A qualified
subchapter S subsidiary (QSSS or
QSub) is treated as a disregarded
entity.
So for purposes of tax treatment, your
choices for disregarded entity are
single-member LLCs or Sub-chapter S
69
Disregarded Entities
70
Entity Comparisons
ENTITY COMPARISONS
COMPARISON OF FEDERAL ATTRIBUTES
Sole "S" "C"
Partnership
Proprietorship Corporation Corporation
Double tax-once on
Passed through to Passed through to
Taxed directly C Corp., again
Net operating partners 1040 via shareholders 1040 via
to owner on when paid to
income form K-1 whether or form K-1 whether or
1040 shareholder as
not distributed not distributed
dividends
Passed through to
shareholders 1040 via Deductible only
Reduces AGI - Passed through to form against income -
Can be carried partners 1040 via
Net operating Losses can be
back 2 years form K-1 Losses
loss carried back 2
and then cannot exceed K-1 – Losses cannot years and forward
forward 20 partners basis in Co. exceed partners 20
basis in Corporation
Passed through to
Passed through to shareholders 1040 via Gains taxed at
Capital gains Taxed to owner partners 1040 via form regular Corporation
formK-1 rate
K-1
Passed through to
Offset against Passed through to shareholders 1040 via Deductible only
Capital losses capital gains + partners 1040 via form against Corporation
$3K per year form K-1 capital gains
K-1
Passed through to
Itemized Passed through to shareholders 1040 via Limited to 10% of
Donations to
deduction on partners 1040 via form Corporation
charities
1040 form K-1 income (adjusted)
K-1
71
Entity Comparisons
Sole
"S" Corporation "C" Corporation
Proprietorship Partnership
Passed through to
Passed through to shareholders 1040 via Can deduct from
Dividends Taxed to owner
partners 1040 via form income 70% of
received on 1040
form K-1 dividends received
K-1
Greater than 2%
Fringe Partially Not eligible to
owners cannot No restrictions
benefits deductible receive benefits
receive benefits
Profit sharing or
Profit sharing or
Retirement defined
Various Various defined contribution
plans contribution plan -
plan - no loans
loans allowed
May be part CG and
Sale of
Capital gain part ordinary Capital gain Capital gain
ownership
income
Double taxation-
First at
Capital gain or loss
Liquidation N/A N/A Corporation level,
to shareholder
then for
shareholder
Partnership not
S Corp. not subject -
Alternative subject - ATM of 20% at
26% to 28% ATM preference items
minimum tax preference items Corporation level
passed through
passed through
15.3% SE tax - Corporation and
Partnership income Undistributed income
50% deductible each employee pay
Payroll tax taxed as SE income is not subject to
on page 1 of 7.65% of FICA
on 1040 payroll taxes
1040 wages
1. income and gains 1. income and gains
increase - losses increase - losses
decrease decrease
Items
affecting the 2. capital increases 2. capital increases -
partners' and - distributions distributions
N/A N/A
shareholders' decrease decrease
basis in
business
3. loans put into the
3. partners share of
Co. increase basis -
liabilities increase
share of liabilities do
basis
not
72
Entity Comparisons
Sole
"S" Corporation "C" Corporation
Proprietorship Partnership
Cannot use cash if
Can use either receipts are $5
Cash vs. Can use either unless
Can use either unless inventory is a million or more or
Accrual inventory is a factor
factor if inventory is a
factor
Allocated according
Splitting of Allocated according
N/A to partnership N/A
income to shares owned
agreement
Must use same year Calendar year, Calendar or fiscal
Tax year Calendar year
as partners generally year
Unreasonable
N/A - unless S had earnings above
Accumulated
N/A N/A previously been a C $250K ($150K for
earnings tax
Corporation PSC) are hit with
39.6% special tax
If deemed
excessive -
Excessive
N/A N/A N/A becomes non-
compensation
deductible
dividend
Double taxation -
Disallowed
Individual tax Partner pays Shareholder pays first at Co. level
personal
rate individual tax rate individual tax rate then at
expenses
shareholder level
Personal Subject to 39.6%
N/A N/A N/A
Holding Co. tax rate
Other Considerations
No special actions - Initial legal costs of
Ease and cost No special just written $500 to $1,000 or Same as S
of formation actions partnership $400 to $600 if you Corporation
agreement do it yourself
Same as S
Termination if Continues until
Corporation with
Period of Discretion of partners agree or on dissolution - not
no restriction on
existence owner partners death or affected by sale of
eligibility of
retirement shares
shareholders
73
Entity Comparisons
Sole
"S" Corporation "C" Corporation
Proprietorship Partnership
Annual Federal and Annual Federal and
Annual Federal and State Corporation State Corporation
Continuing
Minimal State partnership returns & annual returns & annual
costs
returns state filing fee & state filing fee &
minimum tax minimum tax
Shareholders liable Shareholders liable
only for capital only for capital
Owners' Liable for all General partners
contributions and contributions and
exposure to debts of liable for all debts
debts that are debts that are
business debts business of business
personally personally
guaranteed guaranteed
Effect on After stock is After stock is
entity upon Dissolution of disposed of, disposed of,
None
withdrawal of partnership Corporation Corporation
taxpayer continues continues
New partner Easy to do - just Easy to do - just
Transfer of
N/A requires consent of transfer stock to new transfer stock to
ownership
other partners owner new owner
No limit on number
Limitation of No limit on number Limited to 100
N/A and eligibility of
ownership of partners eligible shareholders
shareholders
74
Secretary of State
KENTUCKY SECRETARY OF STATE
Contents:
Domestic Corporation............................................................................. 76
Foreign Corporation............................................................................... 76
Domestic Limited Liability Company ........................................................... 77
Foreign Limited Liability Company ............................................................. 77
Domestic Limited Parnerships ................................................................... 77
Registered Limited Liability Partnerships ..................................................... 77
Business Trusts..................................................................................... 77
Domestic Corporation Forms .................................................................... 77
Foreign Corporation Forms....................................................................... 77
Domestic Limited Liability Companies Forms ................................................. 78
Foreign Limited Liability Companies Forms ................................................... 78
Partnerships ........................................................................................ 78
Limited Parnerships ............................................................................... 79
Foreign Limited Partnerships .................................................................... 79
Limited Liability Partnerships ................................................................... 79
Assumed Names.................................................................................... 80
Dissolutions......................................................................................... 80
75
Secretary of State
KENTUCKY SECRETARY OF adopted Revised Article 9 of the Uniform
Commercial Code.
STATE
DIVISION OF ADMINISTRATION
The Secretary of State directs the
Department of State of the The Division of Administration is
Commonwealth of Kentucky pursuant to responsible for fiscal and personnel
KRS 14.025. The department is organized matters, public documents, legal affairs,
into two divisions: The Division of and special projects and commissions.
Corporations and The Division of
Administration. ANNUAL REPORT REQUIREMENTS
DIVISION OF CORPORATIONS All corporations (profit, non-profit &
professional service), limited liability
The Division of Corporations is divided companies (profit, non-profit &
into three departments: Business Filings, professional service), limited
Business Records, and the Uniform partnerships (filed under 2006 Act),
Commercial Code (UCC) Branch. Business limited liability limited partnerships
Filings is responsible for administering (filed under the 2006 Act), and business
the incorporation of businesses, both trusts that are registered with the state,
domestic and foreign, profit and are required to file an annual report by
nonprofit, including the administration of June 30 of each year.
documents of merger, dissolution, name
changes, and certain stock matters. This Failure to file the annual report will
office is entrusted with filing, result in the company being listed in bad
maintaining, and preserving certain standing with this office and could lead
historically significant documents and to administrative dissolution or
public records of the Commonwealth. revocation of authority to transact
These records include organizational business in Kentucky.
documents for more than 100,000
corporations doing business in Kentucky BUSINESS FILINGS
and trademarks and service marks.
There are a variety of business filings
In addition, the Secretary of State that are administered by the Secretary of
represents the Commonwealth as agent State. The following list represents many
for service of process in cases involving that are utilized by business entities.
foreign corporations, as well as service of Visit their web site for additional
summons and petitions in actions against information.
non-resident motorists.
Business Records is responsible for issuing
certificates of existence, authorization, Domestic Corporation
and certified copies of the original
document that is on file with the Certificate of Existence
Secretary of State. The UCC Branch was Certificate of Existence (long form)
created after legislation was passed Certificate of Voluntary Dissolution
during the 2000 General Assembly which Certificate of Administrative Dissolution
76
Secretary of State
Certificate of Registered Agent Registered Limited Liability
Certificate of No Record Partnerships
Foreign Corporation
Certificate of Registration (domestic)
Certificate of Registration (foreign)
Certificate of Authorization Certificate of No Record
Certificate of Authorization (long form)
Certificate of Withdrawal
Certificate of Revocation of
Certificate of Authority Business Trusts
Certificate of Registered Agent
Certificate of No Record
Certificate of Business Trust
Certificate of Registered Agent (foreign
business trust)
Domestic Limited Liability Company
Certificate of Existence
Certificate of Existence (long form)
Certificate of Dissolution Domestic Corporations Forms
Certificate of Administrative Dissolution
Certificate of Registered Agent
Certificate of No Record Articles of Incorporation Business
Corporation
Foreign Limited Liability Company Articles of Incorporation Nonprofit
Corporation
Certificate of Authorization
Certificate of Authorization (long form) Articles of Incorporation Professional
Certificate of Withdrawal Service Corporation
Certificate of Revocation of
Certificate of Authority
Certificate of Registered Agent
Certificate of No Record Foreign Corporations Forms
Application for Certificate of Authority
Foreign Corporation
Domestic Limited Partnerships
Certificate of Formation Application for Amended Certificate of
Certificate of Registered Agent Authority Foreign Corporation
Certificate of No Record
77
Secretary of State
Application for Certificate of Withdrawal Foreign Limited Liability Company
Foreign Corporation Forms
Application for Certificate of Authority
Application for Registration or Renewal (Foreign LLC)
of Corporate Name Foreign Corporation
Application for Amended Certificate of
Other Forms Authority (Foreign LLC)
Application for Reservation or Renewal of
Reserved Name (ARN) Application for Certificate of Withdrawal
Notice of Transfer of Reserved Name
Application for Registration or Renewal
Notice of Cancellation of Reserved Name of Limited Liability Company Name
Statement of Change of Registered
Office, Registered Agent, or Both
Other Forms
Statement of Change of Principal Office
Address Application for Reservation or Renewal of
Reserved Name
Statement of Consent of Registered
Agent Notice of Cancellation of Reserved
Name Statement of Consent of
Statement of Resignation of Registered Registered Agent
Agent
Statement of Resignation of Registered
Agent
Domestic Limited Liability Companies
Statement of Change of Registered
Forms
Office, Registered Agent, or Both
Statement of Change of Principal Office
Articles of Organization
Address
Articles of Organization Professional
Partnerships
Limited Liability Company
Statement of Partnership Authority
Articles of Organization - Non-profit LLC Statement of Denial
Statement of Dissociation
Statement of Dissolution
Statement of Merger
78
Secretary of State
Limited Partnerships Application for Amended Certificate of
Authority
Certificate of Limited Partnership
Application for Certificate of Withdrawal
Certificate of Dissolution with Respect to
a Domestic Limited Partnership Application for Reservation or Renewal of
Reserved Name
Application for Reservation or Renewal of
Reserved Name Notice of the Transfer of a Name
Reserved for Use By a Domestic or a
Notice of the Transfer of a Name Foreign Limited Partnership
Reserved for Use By a Domestic or a
Foreign Limited Partnership
Statement of Consent of Registered
Agent
Cancellation of Certificate of Limited
Partnership
Statement of Change of Registered Agent
Statement of Consent of Registered or Change of the Address of the
Agent Registered Office, or Both
Change of Registered Agent or Change of Registered Agent's Statement of Change
the Address of the Registered Office, or of Registered Office for Each Affected
Both Limited Partnership
Registered Agent's Statement of Change Statement of Change of the Mailing
of Registered Office for Each Affected Address of the Principal Office
Limited Partnership
Application for Registered Name
Statement of Change of the Mailing
Address of the Principal Office
Application for Renewal of Registered
Name
Notice of Cancellation of Reserved Name
Limited Liability Partnerships
Foreign Limited Partnerships
Statement of Qualification
Application for Certificate of Authority as
a Foreign Limited Partnership
79
Secretary of State
Amendment to a Statement of Assumed Names
Qualification
Certificate of Assumed Name
Statement of Foreign Qualification
Amended Certificate of Assumed Name
Statement of Change of Registered Agent
or Change of the Address of the
Registered Office, or Both Certificate of Withdrawal of Assumed
Name
Registered Agent's Statement of Change
of Registered Office for Each Affected Renewal Certificate of Assumed Name
Limited Partnership
Change of the Mailing Address of the Dissolutions
Chief Executive Office Articles of Dissolution of a Non-profit
Corporation
Statement of Resignation of Registered
Agent Articles of Dissolution of a Profit or Non-
profit Limited Liability Company (LLD)
Statement of Registration or Renewal of
Limited Liability Partnership Articles of Dissolution of a Profit
Corporation *This form is to be used for
dissolution by Incorporators or Initial
Application for Certificate of Withdrawal Directors. New Form
Application for Reservation or Renewal of Articles of Dissolution of a Profit
Reserved Name Corporation *This form is to be used for
dissolution by the Board of Directors or
Shareholders. New Form
Notice of the Transfer of a Name
Reserved for Use By a Domestic or a
Foreign Limited Partnership
Application for Registered Name
Application for Renewal of Registered
Name
80
Statutes, Regulations and References
STATUTES, REGULATIONS AND REFERENCES
Contents:
Statutes ............................................................................................. 82
Regulations ......................................................................................... 82
References.......................................................................................... 82
Web Sites ........................................................................................... 82
81
Statutes, Regulations and References
STATUTES, REGULATIONS & REFERENCES
REFERENCES CCH Editorial Staff Publication.
2009 U.S. Master Tax Guide. Chicago:
CCH.
STATUTES
Anosike, Benji O. How to Form Your Own
KRS 141.010: Definitions for Chapter Profit or Non-Profit Corporation. Rev. ed.
Newark: Do-It-Yourself Legal Publishers
KRS 141.020: Levy of income tax on
individuals
Warner, Ralph and Clifford, Denis. Form
KRS 141.040: Corporation income tax – a Partnership, The Complete Legal
Exemption – Rate Guide. 8th ed. Berkeley: Delta Printing
Solutions, Inc.
KRS 141.0401: Limited Liability Tax –
Exemption - Rate
KRS 141.206: Filing of Returns by pass- WEB SITES
through entities
www.irs.gov
KRS 141.130: Liability for tax on
discontinuation of business www.revenue.ky.gov
www.sos.ky.gov
REGULATIONS
www.cpa-services.com
103 KAR 15:020: Election to pay tax on www.lectlaw.com
share of corporation
www.limitedliabilitycompanycenter.com
103 KAR 16: 370: Corporation income tax
treatment of foreign sales corporations
and domestic international sales
corporations
82
Statutes, Regulations and References
83
