Valuing Pass-Through Entities

Chapter 4Comparison of Different Entity Forms

Previous chapters examined the differences in after-tax returns of business ownership interests stemming from whether a business was formed as a C corporation or as a PTE. However, there are other considerations when choosing an appropriate form of business entity, such as the appropriate form of PTE to select, the impact of PTE form on the presentation of financial statements under generally accepted accounting principles (GAAP), borrowing issues, and so forth. In consideration of these other issues, this chapter accomplishes the following:

• Compares the benefits and limitations of PTEs and C corporations over the course of a business's life, commencing at the start-up phase, moving on to the operating phase, and ending with the wind-down/liquidation/sale phase.
• Contrasts different types of PTEs.
• Describes differences between financial statements of C corporations and those of PTEs.
• Explains the issues considered by banks when lending to PTEs.
• Discusses the prevalence of different forms of PTEs as compared with C corporations.
• Analyzes the issues associated with converting from one form of business entity to another.

Business Life Cycle

Choosing a business entity form is often influenced by the stage of the business's life cycle, the owner's plans, and the owner's ultimate exit strategy. Different facts and circumstances will cause one company to choose to operate as a C corporation, while another will be better able to achieve ...