Ronald G. Matan, Jr March 19, 2017 TAX 650: Federal Income Tax of Corporations Final Project: Memorandum with Appendix
Business Entity When it comes to choosing a type of business entity the most practical questions to ask yourself would be, do you want to pay taxes once or twice, what is your view on liability issues and what kind of economic impact do you want your company to have? When examining these questions, they will assist in the decision of what type of entity to form. In order to pay taxes only once, you would need to eliminate C Corporation because there is a corporate level of taxes involved there as well as regular W2 taxes. Your business is currently a Sole Proprietorship, so this leaves us Partnership and S Corporation to further expand upon before making a final decision. Let’s begin with a Partnership, which at its core according to IRS is, “A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.” As with any decision, there are pros and cons, let’s examine some for a Partnership. Pros of a Partnership are it is a pass through entity for taxes, so there is no corporate level taxation, simplicity and flexibility in formation of the Partnership, profits and losses are shared so you would not take the full impact of a bad year alone. Cons are you need at least two partners to be a Partnership or it would be a Sole Proprietorship, a Partnership may be owned equally but that does not mean the work is divided equally, a General Partnership leaves you open to potential personal liabilities. On the other hand, an S Corporation is defined by the IRS as, “S corporations are corporations that elect 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.” S Corps will also have their own pros and cons, let’s examine those now. Some pros of an S Corp are the same pass through taxation as a Partnership, liability protection which separates your assets from the business, there is more room for shareholders to come in easier than a Partnership. Cons of an S Corp are they are required to pay incorporation fees and file corporate minutes, the shareholders are taxed on the income of the business regardless if they took any of the money or not, and shareholders are required to take a reasonable salary even if the company is not yet profitable (“The pros and”, n.d.).
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