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Unformatted text preview: Chapter C:2 Formation of the Corporation Discussion Questions C:2-1 A new business can be conducted as a sole proprietorship, partnership, C corporation, S corporation, LLC, or LLP. Each form has tax and nontax advantages and disadvantages. See pages C:2-2 through C:2-7 for a listing of the tax advantages and disadvantages of each form. A comparison of the C corporation, S corporation, and partnership alternative business forms appears in Appendix F. pp. C:2-2 through C:2-8. C:2-2 Alice and Bill should consider forming a corporation and making an S corporation election. An S corporation election will permit the losses incurred during the first few years to be passed through to Alice and Bill and be used to offset income from other sources. The corporate form allows them limited liability. Under the check-the-box regulations, a noncorporate entity might elect to be taxed as a corporation and then make an S corporation election. As an alternative to incorporating, Alice and Bill might consider a limited liability company that is taxed as a partnership. pp. C:2-6 through C:2-8. C:2-3 The only default classification for the LLC is to be taxed as a partnership. Because the LLC has two owners, it cannot be taxed as a sole proprietorship. The entity can elect to be taxed as a C corporation or an S corporation. If the entity makes such an election, Sec. 351 applies to the deemed corporate formation. The entity would have to make a separate election to be treated as an S corporation. pp. C:2-8 and C:2-9. C:2-4 The default classification for White Corporation is to be taxed as a C corporation. White can elect to be taxed as an S corporation if it makes the necessary election. The S corporation election will cause the entity's income to be taxed to its owners. The S corporation election is made by filing Form 2553 within the first 2½ months of the corporation's existence (see Chapter C:11). pp. C:2-6 and C:2-9. C:2-5 The only default classification for the LLC is to be taxed as a sole proprietorship. Because the LLC has only a single owner, it cannot be taxed as a partnership. The entity can elect to be taxed as a C corporation or an S corporation. If the entity makes such an election, Sec. 351 applies to the deemed corporate formation. pp. C:2-8 and C:2-9. C:2-1 C:2-6 Some suggested items for this debate include: PRO (Corporate formations should be taxable events): 1. A corporate formation is an exchange transaction; therefore, parties to the exchange should recognize gains and losses. 2. Making a corporate formation a taxable event increases tax revenues. 3. Simplification is achieved by eliminating one of the two options - whether a transaction is taxable or not. This change will make administration of the tax laws easier....
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- Fall '08