...various business formations, some of the most notable are the S corporation, C Corporations and the LLC. While these are all different forms of businesses they do share some similarities. These similarities make it somewhat difficult to determine which kind of business that you need to form. The ultimate decision making comes from the structural differences, and operating advantages and disadvantages. An S Corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level. To qualify for S corporation status, the corporation must meet certain qualifications. It must be a domestic corporation, have only allowable shareholders (including individuals, certain trusts, and estates and may not include partnerships, corporations or non-resident alien shareholders), have no more than 100 shareholders, have only one class of stock and not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations). To dissolve an S Corporation there are a few steps. You must first obtain a vote from the...
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...12 - S CorporationsChapter 12 - S Corporations Student: ___________________________________________________________________________ 1. The alternative minimum tax may apply to an S corporation. True False 2. The alternative minimum tax does not apply to an S corporation. True False 3. Liabilities affect owners’ basis differently between a partnership and an S corporation. True False 4. An S election allows shareholders to realize tax benefits from losses immediately. True False 5. An NOL from a Subchapter C year can be used to offset operating income in an S corporation year. True False 6. An estate can be an S corporation shareholder. True False 7. A maximum dollar sales limitation applies to an S corporation. True False 8. Differences in distribution or liquidation rights among shareholders do not create a second class of stock. True False 9. Straight debt issued in an S corporation year will not be treated as a second class of stock and will not disqualify an S election. True False 10. A widower and his spouse’s estate are treated as one shareholder. True False 11. A former spouse is treated as being in the same family as the individual to whom he or she was married. True False 12. A limited liability company can own S corporation stock. True False 13. An S corporation can be a partner in a partnership. True False 14. Most Roth IRAs can own S corporation stock...
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...C:11-58 a. E&P, January 1 $155,000 Current year taxable income before distribution $40,000 Capital gain on distribution of land* 30,000 Minus: Federal income taxes [$7,500 + (0.25 x $20,000)] (12,500) 57,500 E&P before distribution $212,500 Minus: Cash distribution (100,000) Property distribution (100,000) E&P, December 31 $ 12,500 *E&P and tax gains are the same. Both distributions are fully taxable as dividends to Jeff and John in the amount of $100,000 each. John takes a $100,000 FMV basis in the land he receives. b. AAA, January 1 $125,000 Current year ordinary income $40,000 Capital gain on distribution of land 30,000 70,000 AAA before distribution $195,000 Minus: Cash distribution ( 97,500) Noncash distribution ( 97,500) AAA, December 31 $ -0- AE&P, January 1 $ 30,000 Minus: Remainder of cash and property distributions ( 5,000) AE&P, December 31 $ 25,000 Of each distribution, $97,500 is nontaxable assuming the shareholder has sufficient basis in his stock. The remaining $2,500 of each distribution is a dividend included in the shareholder’s gross income. John takes a $100,000 FMV basis in the land he receives. ...
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...A. Whether a C corporation that has preferred stock and common stock with both voting and nonvoting rights, eight shareholders among whom there are a Swedish individual and Plantation Sugar partnership, may elect to be an S corporation, under section 1361(b)(1)(B), 1361(b)(1)(C) and 1361(b)(1)(D)? B. Whether all the shareholders must consent to the election of S status, under section 1362(a)(2)? C. Whether the election of S status is effective if a C corporation does not meet all the requirements in the election year, under Reg §1.1362-6(2)(ii)(B)? D. Whether an S corporation can keep its C corporation tax year, which ends in June 30, without documenting any business purpose, under the provision of section 1378(b)? E. Whether a newly elected S corporation has to recapture LIFO amount in inventory, according to section 1363(d), to the extent of how much? F. Whether a newly elected S corporation shall recognize the built-in gain from the sale of the appreciated land under section 1374(b)(2), to the extent of how much? G. Whether an S corporation is allowed to use net operating losses incurred from previous C corporation years to offset the net recognized built-in gain for the succeeding S corporation years, in compliance with section 1371(b)(1)? H. Whether the S corporation can deduct all the accident and health insurance, and defined contribution pension plan, under section Conclusion: A. To become a valid S corporation, a C corporation must file the election and...
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...Chapter 22 S Corporations SOLUTIONS MANUAL Discussion Questions: 1. [LO 1] In general terms, how are C corporations different from and similar to S corporations? S corporations are incorporated under state law and thus have the same legal protections as C corporations. They are governed by the same corporate tax rules that apply in the organization, liquidation, and reorganization of C corporations. However, unlike a C corporation, an S corporation is a flow-through entity and shares many tax similarities with partnerships. For example, basis calculations for S corporation shareholders and partners are similar, the income or loss of an S corporation flows through to its owners, and distributions are generally not taxed to the extent of the owner’s basis. 2. [LO 1] What are the limitations on the number and type of shareholders an S corporation may have? How are these limitations different from restrictions on the number and type of shareholders C corporations or partnerships may have? Only U.S. citizens or residents, certain trusts, and certain tax-exempt organizations may be shareholders, no corporations or partnerships. In addition, S corporations may have no more than 100 shareholders; family members and their estates count as one. C corporations and partnerships do not have a limit on the amount or type of shareholders or partners. 3. [LO 1] Why can’t large, publicly traded corporations be treated as S corporations? A publicly traded corporation...
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...Business Law II Research Paper The advantages, from a liability standpoint, of a business incorporating and that given a business is going to incorporate…the difference in tax treatment between a C-Corp, Subchapter S and an LLC When businesses are started, one consideration that must be made is what type of business it will be. Many decide to incorporate themselves and look to the advantages they may gain from this. Liability may be one of the biggest advantages to incorporating a business. Along with advantages of incorporating, the tax treatment for different types of businesses will differ whether it is a C-Corp, Subchapter S, or an LLC (limited liability corporation). All of these options will give businesses the best solution to take advantage of different types of tax treatment and the advantages of incorporating. From a liability standpoint, incorporating a business is going to protect the owners’ personal assets from business obligations, debts, and any other business activity. With out the liability protection of incorporating, the business owner is responsible for these obligations, debts, and business activity. Once an owner makes the decision to incorporate, they separate personal assets from the business (“Incorporating a business,”). It is important for owners to incorporate to help protect themselves and their families from taking on the burden of a failing business. How does incorporating protect business owners’ personal assets?...
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...responsibilities, liabilities and profit of the business. • Liability- One major disadvantage of a sole proprietorship is the liability. As a sole proprietorship both the owner and business are one and the same and therefore both are subject to any unpaid debt. If the business has debt that is unpaid then the owner has the same unpaid debt and creditors could go after the individual. The same for if the owner has debts separate from the business the creditors could go after the business. As a sole proprietorship business, liability insurance could be purchased to help abate the liablity. • Income Taxes- As a sole proprietorship business, there is no double taxation as associated with a C-corporation. A sole proprietorship business deducts business expenses on a Schedule C of their personal Taxes. A disadvantage of a sole proprietorship is you will be taxed on total profits of the business and be subject to self-employment tax. • Longevity/Continuity- The longevity of a sole proprietorship business is the life span of its owner. If the owner dies without selling or passing the business on to a relative the business no longer exists. • Control- An advantage of the sole proprietorship is that the owner has complete control of the business and makes all decisions. On the other hand, there is no input from other viewpoints and can be a disadvantage when considering on expanding or continuing the business. • Profit Retention- All profits are made by a sole...
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...Small Business Idea Paula Boyce University of Phoenix Accounting ACC - 561 Professor Trenda Hackett December 07, 2011 Small Business Idea The government has released fund for creating small businesses. One’s interest is to establish a small business and must determine which of the four forms of business organization will best suit the business chosen. Legal, tax, accounting, and other implications when selecting from the four business types are matters of considerations (University, 2008 - 2011). The four forms of business include Sole proprietorship, Partnership, C Corporation, and S Corporation. Discussion will explain advantages and disadvantages of the four forms of business, financial statement associated with each form of business organization, and the consequences of tax implications, legal implications, and accounting implications such as SOX and FASB. An explanation what one’s business provides, the choice of one’s business organization form, and one’s rationale for choosing the form of business organization chosen (University, 2002). Sole proprietorship advantages and disadvantages Sole proprietorship is the most common and simplest form of business. An individual owns and manages the business and is responsible for business transactions and responsible for debts and liabilities incurred (AllBusiness.com, 2007, p. 1). Advantages of sole proprietorship is the proprietor is in full control of the business, no corporate taxes, legal cost is...
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...Legal Issues for Business Organizations Sole Proprietorship The sole proprietorship is the most common form of business and has been around for many years. It is the simplest form of business because it is owned and operated by an individual. Some advantages to choosing a sole proprietorship would be minimal state and federal regulations, which make it easy to control and manage. Another is the cost to start a Sole Proprietorship is minimal. It is a good form of business for someone who is starting out small. In many cases this type of business can be operated out of the owner’s home. All business decisions are made by the owner, therefore he or she is entirely responsible for the operations, financial and legal aspects of the business. Some disadvantage to a sole proprietorship would be. The owner has unlimited liability and his personal wealth and assets are at risk to claims against the business. Another would be that raising capital is difficult for a sole proprietorship and is usually limited to the owner’s personal funds or credit available based on his personal credit history. Another key point to a sole proprietorship is that the business is not required to file or pay taxes. The sole proprietorship is a tax reporting entity, not a tax paying entity so the business taxes are filed at the personal rate of the owner on his personal income taxes. Business Services Sole proprietorship (May 20, 2008). Retrieved on (March 9, 2010) from Iowa Secretary of State. http://www...
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...The Different forms of business organizations can be a very confusing topic for many business owners. There are many different types of organizations including, but not limited to, Sole Proprietorship; General Partnership; Limited Partnership; C-corporation; S-corporation; and Limited Liability Company. Each type of business organization has its own benefits, drawbacks, and restrictions. This report will summarize each type of business organization and explain the drawbacks and benefits in a clear, concise, and easy to understand way. Sole Proprietorship A Sole Proprietorship is exactly what it sounds like. It is a company that is owned solely by an individual. It may need to be registered with the Secretary of State within the state that the company is owned and operated. This is required if the following conditions apply: * The company is run under a fictitious name (i.e. Marriage Makers, Simply Savings, or Tasty Treats). * The business provides services or goods that require licensure (i.e. Insurances, alcohol, or food). A Sole Proprietorship is not differentiated from the owner which is why, if the above stated criterion does not apply, the business is not required to register with the Secretary of State. The money that is made from the business belongs solely to the owner. For the same reason, the debt that is accumulated by the company is the sole responsibility of the owner. This circumstance makes it possible for a debtor to sue the owner of the company...
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...Sole Proprietorship A sole proprietorship refers to a form of organization owned by a single individual. In this business, a single person makes all the decisions and does not have to engage a legal department to approve contracts. The owner of such a business can only use personal funds even though he or she may have separate checking and savings accounts for the business. The first characteristic of this form of business enterprise is liability. A sole proprietor suffers from unlimited liability. The owner becomes liable personally for all the obligations and debts of the business. The second characteristic is income taxes. Businesses pay federal income tax just like individuals. In a sole proprietorship, the owner pays income tax only once on the business income, which he or she reports on their personal income form. The third characteristic is control. In a sole proprietorship, the owner makes all the decisions concerning the business. In this business, the owner does not have to grant control to other people. The fourth characteristic is profit retention. If a sole proprietorship makes profits, the money belongs exclusively to the owner. The reason is that the owner and the business are one. The fifth is location. The owner can move or expand the business to a different state without consulting anybody. This is because the owner is the sole decision maker. The sixth characteristic is convenience or burden. The owner makes sure that the business complies with all meeting...
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...The S corporation follows many of the basic Subchapter C tax provisions but the Federal income tax treatment is more like that of a partnership. There are a number of advantages of the S corporation when compared to the C corporation. Unlike the C corporation, the S corporation is not taxed as a legal entity but the profits and losses are passed through to the shareholders which can be used to reduce taxes they owe on other types of income. Shareholders of an S corporation only pay personal taxes on the distribution of profits but the corporation is not taxed. Shareholders of a C corporation are taxed twice. When the corporation receives profit it pays taxes and when the shareholders receive their share of the dividends they are taxed as individuals. The S corporation is therefore not double taxed and saves on income taxes (Anderson, Pope, and Kramer, 2014). I would advise that Brooklyn and Bronx Corporation to take into consideration the reason it wants to elect the S corporation status and where the state in which the business is in. S corporation status is usually elected by a business that anticipates losses in its early year or years; and usually switches status when the business picks up so that it could start recognizing profits. Some states do not recognize S corporations and there tax S corporations as a C corporation (Anderson, Pope, and Kramer, 2014). Rupert, R. J., Pope, T. R., & Anderson, K. E. (2014). Prentice Hall’s Federal Taxation, 2014 Edition. Upper Saddle...
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...purchase a manufacturing company, Smithon Widgets (a C corporation), that has been very profitable. Mr. Jones is the majority shareholder of another C corporation. Johnson Services that has incurred significant losses. 1. Outright purchase of Smithon stock a. 1. Issue: Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company – would that raise debt to equity issues? 2. Conclusion: Mr. Jones, you should not purchase the stock of Smithon outright. If this is done, then you would inherit all assets and liabilities of Smithon. This would increase your personal tax liability. Issuing debt in Johnson Services Company to pay for the Smith Company would not be a good idea considering, Johnson services has incurred significant losses already. This would definitely raise debt to equity issues, since Johnson Company is operating with an existing loss and using debt equity to acquire additional assets. This would also produce a higher debt to equity ratio, meaning that most of Johnson Services’ assets are financed by debt. This may deter future investors. b. 1. Issue: Should Mr. Jones convert Smithon to an S corporation and change the fiscal year end to a calendar year end? 2. Applicable Law & Analysis: Would a convert of entity be beneficial to your tax situation? An S corporation is not subject to the corporate tax, except for a tax...
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...that a corporation must meet in order to qualify under Subchapter S? -Be a domestic corporation; - Have no more than 100 shareholders; - The S Corporation must include only eligible shareholders in the election; - The entity must have only one class of stock; - The business must not be an ineligible corporation. 21-13 What limits are placed on the selection of a tax year of an S corporation? How do these limits differ from those applicable to C corporations and partnerships? An S Corp. must use a calendar year as their taxable year, unless certain circumstances are approved for the S Corp. by the IRS, which may allow the S Corp. to use a tax year other than the calendar year. Using a calendar year can be a challenge for businesses that changed entity type to an S Corp, and are used to using a fiscal year. This is also contrasted from a C Corp., which can use a calendar year or a taxable year, and a partnership, which normally uses whatever the taxable year is currently used for the individual partners in the partnership. 21-26 Durrabusiness is organized as a regular C corporation in 1986. At the beginning of the present year, Durrabusiness elects to be an S corporation. Will the election cause a recapture of the general business investment credit taken on any property purchased while a C corporation? The election as an S Corporation will not cause a recapture of the general business investment credit taken on property purchased while the status was a C Corp. The...
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...LIT1 Task 1 Part A SOLE PROPRIETORSHIP: A business that is owned by one person and is not incorporated. Sole proprietorships are easy to start. You don’t need a lawyer and you don’t need to register with the government except to obtain a business license or permit where required. * Liability: The owner is liable for all debts incurred by the business. His personal property can be attached. He is also responsible for any damage an employee may cause while working for him. * Income Taxes: The owner pays ordinary income tax on all profits. This can be an advantage because most of the time personal tax rates are lower than corporate rates. But, a sole proprietor will have to pay self-employment tax at a rate of 13.3% for the first $106,800 of income and 2.9% after that. The owner needs to register for an EIN (Employer Identification Number) if he will have employees. Payroll taxes need to be paid on employees. * Longevity/ Continuity: The business exists as long as it is financially solvent, the owner is alive, and the owner continues running the business. If the owner brings in another investor it becomes a partnership. * Control: The owner is solely responsible for all decisions concerning the management of the business. If they want to expand the business or end the business it's totally up to them. * Profit Retention: The owner keeps all profits and he also takes all losses. * Location: Different...
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