Contributed By McGuireWoods LLP
Corporate income is subject to two layers of taxation, resulting in a significant reduction in return, due to the structure. Furthermore, shareholders are often restricted in how profits can be shared. Despite these drawbacks, corporations are often utilized by foreign investors seeking to avoid withholding issues and tax-exempt investors seeking to jeopardize their exempt status. The pass-through nature of partnerships, though a benefit in many cases, serves the opposite in such instances.
LLCs and LPs offer the equity holders significant flexibility in how profits can be shared. In addition, the single layer of taxation allows investors to maximize returns. Because of the pass-through nature of partnerships, this allows for tax-planning opportunities whereby often the purchase of partnership interests effectuates an asset sale, allowing the buyer to take advantage of increased basis in assets acquired.