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chapter_2_notes

Course Number: TAX 5015, Fall 2008

College/University: UCF

Word Count: 3468

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2-1 Chapter 2 Corporations: Introduction and Operating Rules (2009) Learning Objectives: updated: August 15, 2008 Identify some of the advantages and disadvantages of various forms of conducting a business Compare the taxation of individuals and corporations (similarities & differences) Review the tax rules unique to corporations Understand the corporate income tax formula & compute the corporate...

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2 2-1 Chapter Corporations: Introduction and Operating Rules (2009) Learning Objectives: updated: August 15, 2008 Identify some of the advantages and disadvantages of various forms of conducting a business Compare the taxation of individuals and corporations (similarities & differences) Review the tax rules unique to corporations Understand the corporate income tax formula & compute the corporate income tax I. Business Entity Choices A. Sole proprietorship B. Partnership 1. 2. 3. 4. General Limited Limited liability partnership (LLP) Limited liability company (LLC) C. Corporation 1. Regular C corporations 2. Subchapter S corporations (S-corps) Note: For more information see Business Entities Matrix (chapter 2 web page). D. The choice of entity should be based on a combination of tax and nontax factors. 1. tax factors include: Is it a tax-paying or tax-reporting entity? Can the owner be treated as an employee? When is income taxed? (when earned or when distributed) The top corporate rate is 35% (39% on a limited range of taxable income), as is the top rate for individuals. However, for a specified level of income the corporate or individual tax rate can be higher because their tax rate schedules are different. The tax rate on qualified dividends must also be considered. Character. With pass-through entities, items of income, expenses, and losses retain their character for the owner. C corporation items do not pass through (especially losses). 2-2 2. nontax factors may override tax considerations: limited liability ability to raise larger amounts of capital continuity of life for the entity free transferability of ownership interests centralized management II. Sole proprietorship A. Advantages: 1. entity not subject to separate tax (income reported on owners Schedule C which is attached to owners Form 1040) 2. owner can contribute/withdraw assets without tax consequence 3. losses can be used to offset other sources of income (subject to some limitations) B. Disadvantages: 1. all profits taxed at individual level to owner when earned even if not distributed 2. sole proprietor cannot be an employee of the business 3. unlimited liability 4. earnings subject to self-employment tax as well as federal income taxes (and most likely state income taxes) III. Partnership A. Advantages: 1. are not subject to separate tax (fil...
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