Corp. Sol., 2008 Chap.9

Corp. Sol., 2008 Chap.9 - Chapter C:9 Partnership Formation...

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Chapter C:9 Partnership Formation and Operation Discussion Problems C:9-1 Advantages of a partnership for Yvonne and Larry include: 1. The partnership itself is not subject to tax, thereby eliminating the problem of double taxation that exists for C corporations. p. C:9-4. 2. Partners may divide the partnership's profit or loss among themselves without regard to their proportionate capital interests (as long as the allocation has substantial economic effect). pp. C:9-17 through C:9-20. 3. Partnerships are popular because of the relative simplicity and informality inherent in creating and operating such entities. No legal agreement is required to form a partnership but a written agreement is advisable. p. C:9-2. 4. Under the conduit principle of taxation, partnership losses and other items receiving special tax treatment flow through to the partners. p. C:9-4. C:9-2 A corporation provides limited liability protection for the business owners while a general partnership does not. The purchase of the inn is likely to be financed with debt and additional debt is likely to be incurred during the renovations. The construction required during the renovation and the day-to-day operation of the inn provides significant exposure for liability from lawsuits. The partnership form would not protect the owners of the business from possibly losing their individual assets. If the owners want the advantages of a partnership and still have limited liability, they may want to consider a limited liability company (LLC) or a limited liability limited partnership (LLLP) if available in the taxpayer’s state. pp. C:2-3 through C:2-6 and C:9-2 through C:9-4. C:9-3 Because Sam will be providing business advice; this partnership should be arranged as a general partnership. Both brothers will be actively managing the business and therefore limited liability protection would not be available to Sam if the partnership is created as a limited partnership with Sam as the limited partner. The brothers may want to consider an LLC instead of a partnership. pp. C:9-2 through C:9-4. C:9-1
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C:9-4 Whether Doug receives a profits interest or a capital and profits interest; he theoretically should report the value of the property he receives for services as ordinary income. In this case, the initial basis for his partnership interest equals the amount he reports as income. If the profits interests cannot be valued, however, Doug recognizes no income and has a zero basis in his partnership interest. Also, under Rev. Proc. 93-27, 1993-2 C.B. 343, the IRS will not treat receipt of a profits interest as a taxable event unless one of the following events occurs: (1) the profits interest relates to a substantially certain and predicable income stream, (2) the partner disposes of the interest within two years of receipt, or (3) the interest is a publicly traded partnership. (Note: The IRS is in the process of revising its rules concerning service partners.
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Corp. Sol., 2008 Chap.9 - Chapter C:9 Partnership Formation...

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