The Internal Revenue Code (IRC) is the federal statute that outlines how different business entities are taxed. Corporations are typically subject to corporate income tax, and shareholders are taxed on dividends (double taxation). Partnerships, sole proprietorships, and S corporations are generally pass-through entities, meaning the income is taxed on the owners' personal tax returns, avoiding double taxation. Limited Liability Companies (LLCs) can choose between being taxed as a corporation or a pass-through entity. The IRC also provides rules for deductions, credits, and other tax benefits that can influence the choice of entity.
The Securities Act of 1933 requires that any offer or sale of securities be registered with the Securities and Exchange Commission (SEC) unless an exemption applies. This registration process involves disclosing financial and other significant information to potential investors. The act aims to ensure that investors have enough information to make informed decisions. The choice of business entity can affect the complexity and cost of complying with these regulations, as corporations are typically subject to more stringent requirements than other entities like LLCs or partnerships.
ERISA does not require any business to establish a retirement plan, but it does require those that do to meet certain standards. The act is relevant to the choice of entity because it governs how employee benefit plans, including equity incentive plans like stock options, are managed, and it imposes fiduciary responsibilities on those who manage and control plan assets. Compliance with ERISA can be more complex for corporations than for other types of business entities.
The Sarbanes-Oxley Act of 2002 was enacted in response to major corporate and accounting scandals. It established new or enhanced standards for all U.S. public company boards, management, and public accounting firms. It includes provisions such as the requirement to certify the accuracy of financial information and to establish internal controls and reporting methods on the adequacy of those controls. Private companies and other types of entities are generally not subject to these requirements, which can influence the choice of entity decision.
Each state has its own Limited Liability Company Act, which provides the legal framework for the establishment and governance of LLCs within that state. These acts typically allow LLCs to be treated as pass-through entities for tax purposes, unless they elect to be taxed as a corporation. They also provide for the limited liability of members, flexible management structures, and the ability to establish varying financial rights among members. The choice of an LLC as a business entity can be attractive due to these flexible provisions.