...Businesses fall under one of two federal tax systems: Taxation of both the entity itself (on the income it earns) and the owners (on dividends or other profit participation the owners receive from the business). This system applies to the business S-corporation-called the "C-corporation" (C-corp) for reasons we'll see shortly-and the system of taxing first the corporation and then its owners is called the "corporate double tax." "Pass through" taxation. The entity (called a "flow-through" entity) is not taxed but its owners are each taxed (more or less) on their proportionate shares of the entity's income. The leading forms of pass through entity (further explained below) are: Partnerships, of various types. "S-corporations" (S-corps), as distinguished from C-corps. Limited liability companies (LLCs). A sole proprietorship such as John Doe Plumbing or Marcus Welby, M.D. is also considered a pass through entity even though no "organization" may be involved. The first major consideration (in this case, a tax consideration) in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass through entity that has only one level (directly on the owners). Losses are directly deductible by pass through owners while C-corp losses are deducted only against profits (past or future) and don't pass through to owners. The major business consideration (as opposed to tax consideration) in choosing the form of business is...
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...Defining Business Organization SOLE PROPRIETORSHIP: An unincorporated, one-man business • LIABILITY – This form of business has potentially the largest liability on the business owner. All liability falls to the owner on a personal level. Any debts the company incurs can be held against the owner to personally rectify. If the owner does not rectify the situation, any vendors or bill collectors left unpaid can come after the owners personal possessions such as their home, vehicles, miscellaneous assets, etc. • INCOME TAXES – The government views the sole proprietor and business as one and the same. The owner must report his business earnings and losses as personal income on a standard 1040 Form. • LONGEVITY/CONTINUITY – With this form of business, very little red tape stands in the way of immediately, and continuously, operating under this business structure. On the contrary, because the liability is solely, personally held, the company can close quickly due to increased debts and loss of control of finances. • CONTROL – This business structure and the owner are viewed as one and the same. Control of the business, its decisions, and all actions, rest completely with the owner. • PROFIT RETENTION – This business structure and the owner are viewed as one and the same. All profits are received by the owner, and distributed as the owner discretion. • LOCATION – This type of business structure can be located anywhere the owner resides or does business...
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...Write a brief description of the form of business ownership, advantages and disadvantages. The key characteristics of the form of ownership should be addressed by discussing six of the seven bullet points below. You will want to have the heading as the form of business ownership and then use the bulleted list below for the key characteristics. Sole Proprietorship: * Liability- Liability in a Sole Proprietorship is incurred entirely by the proprietor. There is no shelter from the liabilities of the company for the individual, nor is there shelter on the part of the business from the liabilities of the proprietor. * Income Taxes- Income from the business is considered by the IRS as income for the proprietor. The IRS makes no distinction. * Longevity - At the moment the proprietor dies, the Sole Proprietorship ceases to exist. Assets of the company are considered the individual property of the proprietor for the purposes of the proprietor’s estate. * Control- Control of all aspects of the business is under the sole direction of the proprietor. There is complete control of the organization and its functions, as well as its liabilities by the business owner. * Profit Retention- All profits generated by the business are retained by the proprietor. * Location Regulated by state statute, moving a sole proprietorship is relatively easy. Should the proprietor decide to relocate, registration with the new department of state may be necessary...
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... free to consult to whomever he/she likes. • Unlimited Liability -‐ The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities • Direct Motivation – Since the profits earned goes directly to the owner there is a greater motive to perform. • Ease to form and dissolve – Since the business is not a corporation it is fairly easy to startup and dissolve. • Taxation – The owners conduct a pass through taxation in which the income is reported on the owner’s personal tax return. • Longevity – A sole proprietorship exists as long as the owner is living or until the owner decides to close the business. • Location – The owner has...
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...growth and ownership. Given the concerns regarding liability, taxation and ability to raise capital of the current business structure, the company should retitle itself to be considered an LLC. Under the current classification of Sole proprietorship, the owner is held fully liable for all business obligations, receives no additional tax benefits and cannot bring in partners/shareholder as a means to raise capital. The business will also cease to exist once the owner is no longer operating the company. An LLC structure, as well as S-corp and C-corp, would generally shelter both the members and shareholders from the liabilities incurred by the business. The advantage of an LLC over an S-corp or a C-corp is that it would be much easier to setup, maintain, and control with the current owner structuring the company as they see fit. Given the minimal amount of intended investors of the company, it does not appear that buying and selling of company stock is a main concern. The new structure should have the ability to do this as needed, but other concerns take precedence over this. It is for this reason that a C-corp should not be considered due to the high regulations, increased administrative requirements, and double taxation that will occur. An S-corp also carries the strict record keeping requirements of a C-Corp but eliminates the possibility for double taxation. The problem with an S-corp is that profits must be directed according to shares in the company...
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...Barbara owns 40% of Partnership A and 40% of C Corp B. Each entity has $100,000 of net taxable income. Neither entity makes any distributions. What are the tax consequences to Barbara from each of her investments? Will either entity have to pay tax for the year? If so, how much assuming a 35% tax rate? Since partnership A has $100,000 net taxable income, and Barbara owns 40% of the partnership, therefore, Barbara’s gross income before tax should be $4,000. Base on the tax regulation, partners of a partnership need to fill out form 1065, with the 35% tax rate on Barbara’s $4,000 tax basis income, she needs to pay for $1,400 tax from the partnership A. C Corp. B also has $100,000 net taxable income, and the corporation needs to pay 35% of the tax, which is $35,000 however, without divided distributing, Barbara’s tax basis income won’t be impacted. 3. Janice is an 80% owner of Java. Java has $100,000 of ordinary income, $20,000 of long-term capital gain and $10,000 of charitable contributions. How do Janice and Java treat these items if Java is a C Corporation? If Java is a...
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...assumes all 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...
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...Limited Liability Company (LLC) vs. Sub-Chapter S Corporation (S Corp) What is the difference between an LLC and an S Corp? When choosing to incorporate, the most common decision smaller businesses face is which type of corporation to form. Here is a comparison between LLCs and S-Corporations. LLC formation came into its own at the end of 1996 when the “check-the-box” taxation regulations were passed and LLCs were allowed to enjoy, among other things limited liability, flexibility of management, and the option to elect pass-through taxation. A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. When forming an LLC there are some general principles one must adhere to per State. First when choosing a name for your LLC you need to follow three rules. One it must be different from an existing LLC in your state. Two it must indicate that it's an LLC (such as "LLC" or Limited Company"). And three it must not include words restricted by your state...
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...exposing their personal assets to business liabilities. Write a short paper advising Bill and Darlene what business form you would recommend for them as they start up their business. State any assumptions you make. There are many different options for Bill and Darlene as they decide to start their business together. They also have to make some important decisions as to the type of business structure they should form. It will have an impact on how much Bill and Darlene will have to pay for taxes, the amount of paperwork necessary and the personal liability they face. The decision depends on the individual circumstances of the business owners. There are 3 primary factors that should be considered when choosing a business entity: liability, taxation and record-keeping (Entrepreneur.com). Liability Bill and Darlene need to determine to what extent they need to be insulated from legal liability. This can depend on the kind of business they’re planning to start. A business that has a large amount of fixed assets that require hefty investments may mean the potential first year losses will be higher than expected so it would be better to limit their personal liability for the business losses. A Limited Liability Partnership (LLP), a Limited Liability Company (LLC), or a corporation can allow them to insulate their assets in the case they are found legally liable for damages. An LLC allows any entity to be owners but they offer more flexibility than a corporation. This is important...
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...Chapter 14 1. Please describe the concept of "double taxation" and discuss which entity(ies) are subject to this type of taxation. (5 pts) Corporations other than S Corps are considered double taxed. The corp is taxed on income and then if the earnings are paid out to shareholders that money is taxable income to the shareholder. If any of it was deductible then perhaps it wouldn’t be double taxation but this is not the case. However, for taxpayers in the 10% tax bracket they are not taxed on the dividend income. 2. What type of taxpayers are considered "eligible" taxpayers with regard to special ordinary loss treatment of IRC Section 1244 stock? (5 pts.) A taxpayer is considered eligible if; the individual sustaining the loss who was issued stock by a small business or corp and, An individual who is a partner in a partnership at the exact time that the stock was acquired from the issuance of a small business. The stock must have been continually held from date of issuance in order to claim a deduction under section 1244. A corporation, any trust or estate is not entitled to such deductions. 3. Please describe how the treatment of capital gains(losses) differ for a C Corporation as compared to an Individual. ( 5 pts.) Professor, A main difference is that for Corps, no special treatment is given for LT Capital Gains. There is also no deduction for capital losses that exceed capital gains for corps. The process is still similar for individuals in that the...
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...Zhen Shen Tax 635 Prof. Biagio Pilato S Corp Is Becoming Less Favorable among Small Businesses S Corps continue to be the most prevalent type of corporation. According to the IRS’s most recent data, about 70% percent of all corporations filed as an S Corp. Some are regular corporations electing S Corp status and some are LLCs, checking the box for corporate taxation and then electing S Corp status. However, the S Corps status is losing its attractiveness to LLCs and even C Corps due to reasons from both government side and the corporation side. One benefit for a small business to elect as an S Corp but not an LLC is that the S corporations may have preferable self-employment taxes compared to the LLC because the owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount. Corporate earnings after payment of the salary may be able to be treated as unearned income that is not subject to self-employment taxes. In 2015, employers must withhold 7.65% of the first $118,500 of an employee's pay for Social Security and Medicare taxes, and 1.45% of earnings above that amount for Medicare taxes alone. The employer adds an equal amount and sends these funds to the IRS. The IRS collects a similar 15.3% tax on the first $118,500 earned by a self-employed person and a 2.9% tax on earnings above that amount. This is the self-employment tax. For an S corporation, the rules on the self-employment tax are well established: as an S...
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...of their business. Today there are several entity options available for entrepreneurs. If he or she has had no previous knowledge of business entities then they may not fully recognize the crucial role the selection of an entity plays in the business’ taxation procedure. The tax liability one is responsible for depends greatly upon the election of a particular entity whether it is a Limited Liability Partnership, Limited Partnership, Limited Liability Company, S corporation, C Corporation, or a Business Trust. Within each of the different organized entities federal law has provided each organization with separate and distinct procedures in accounting for its assets in relation to its tax liability (Drucker, 1989). Limited Liability Partnership A limited liability partnership more commonly known as a LLP engenders aspects of both partnerships and corporations, two entities that will later be explored in greater detail. One should elect to enter into a limited liability partnership if investors wish to partake in the management of the business. Just as in a partnership or limited liability company, the profits of a LLP are dispersed among the partners for tax purposes, ultimately avoiding the problem of “double taxation” which is often exhibited in corporations. Similar to that of the shareholders of a corporation all partners in a LLP have a form of limited liability, however contrary to corporations partners actually possess the authority to manage the business directly...
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...its state of incorporation. III. FORMATION A. STATE STATUTES 1. There must be an enabling act permitting the existence of the corporate entity. 2. Articles of incorporation form a CONTRACT between the corp and the state. 3. Ultra Vires Acts: acts engaged in by the corporation that exceed what is authorized in their Articles of Incorporation or acts that violate the law. ONLY the corp’s shareholders and/or the State of incorporation can challenge (sue) re: ultra vires acts. B. ARTICLES OF INCORPORATION Must be filed w/ the state and must contain the following: 1. corp name 2. name & street address of registered agent 3. name(s) & address(es) of incorporators. 4. number & class(es) of authorized shares of stock These four requirements are universally req’d & must be memorized. Some states also require: 5. corp purpose (broadly defined) – “to engage in any legal activity” 6. corp powers 7. par value of authorized stock Shares of stock sold below par value, B. BY LAWS Not legally required, but corps will frequently have by-laws, which govern how the corp will be run. 1. cannot conflict w/articles 2. can be amended by EITHER Bd of Directors OR Shareholders C....
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...LIT1: Task 310.1.5-02, 11, 13 Part A Sole Proprietorship: This form of business is the most common form of new business startup. Legal and tax issues are basic and can be followed without significant assistance from external sources. The business and owner are one in the same and all liabilities will fall upon them personally. The primary key to being a sole proprietor is the owner maintains independence in the decision making of the business and how he or she implements their business plan. LIABILITY: Individual and the business are treated in the same manner. The sole proprietor holds responsibility is for all losses and profits and has the additional responsibility of being personal liable for all actions of the business. INCOME TAXES: The sole proprietor profits are taxed as their personal income with only minimal tax incentives compared to other business models. Business profits or in the case of losses must be reported as personal income tax. LONGEVITY/CONTINUITY: Sole proprietorship can end their business at anytime without legal formalities. CONTROL: An SP business is operated as a single business owner. The control of the business cannot be given to anyone else. PROFIT RETENTION: The profits of the business belong to the owner of the business and are not shared. LOCATION: A sole proprietor is not limited to where it can operate within the United States. Only localized codes and regulations can affect where the business can be located. CONVENIENCE/BURDEN: Sole...
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...Business Form Number of Owners? Are Owners Liable for the firm’s debt? Do Owners manage the firm? Does an Ownership change dissolve the firm? Access to Capital Taxation Sole Proprietorship One Yes Yes, in a sole proprietorship the owner manages all aspects of the business. No, Not always, once the change in ownership, the owner can change the decisions pertaining to the goal of the company and the gp's will have to make that change in direction for the new owner. Many lenders are hesitant to provide financing to owners of sole proprietorships partially due to fear about their ability to recover the funds should the owner die or become disabled. Lenders who make such loans require borrowers to provide personal guaranties on the loan. Since a sole proprietorship is one owner and if that owner needs access to capital they will be responsible for backing the loan with their personal finances. If an individual has bad debt and decides to file bankruptcy then the business loan will be affected. Banks and other lending institutions are aware that such scenarios occur, and they plan accordingly. Personal Taxes General Partnership Two or more principal owners/managers or entities; who are co-owners/co-managers that share in the profits of the business operation. Yes, All partners are responsible for any debts which the partnership may incur. If debts are not paid, the creditors may seek to recoup their losses by going after the partner’s personal assets. All partners have unlimited management...
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