Chapter 16 slides.pptx - Chapter 16 Corporate...

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Chapter 16: Corporate Operations [with some intro notes from Ch. 15] Instructed by: Kelly Wentland 1
Outline Today Introduction to business entities Corporations: Beginning ownership (purchase shares) When conducting operations year to year When distributions are made When dispose of ownership (shares) Book-tax differences Favorable versus unfavorable Temporary versus permanent Tax rate Compliance requirements Next class In-class practice 2
Owner requirements for the three primary entity classifications Corporations require at least 1 shareholder We focus on C corps in Ch. 16 We don’t cover S corps (Ch. 22). But, they have special ownership requirements different than C corps. Partnerships require at least 2 owners Sole proprietors are when there is only one owner 3
Characteristics by business type Characteristic Corporation LLC General Partnership Limited Partnership Sole Proprietorship Must formally organize with the state? Yes (articles of incorporation) Yes (articles of organization) No (but still prepare agreements amongst partners) Yes (certificate of limited partnership) No (unless it is a single member LLC) Default is tax treatment as flow through? No Yes (but can opt to be treated like corporation) Yes Yes Yes Who is responsible for liabilities of the business? Business entity Business entity General partner(s) General partner(s) Owner (unless LLC, then only if negligent) Is the legal arrangement among owners flexible? Not flexible Flexible Flexible Flexible Not applicable Allows initial public offering 公开销售证券 ? Yes No No No No Tax Form? 1120 (C corp) 1120S (S corp) 1065 1065 1065 1040 (on the owner’s personal return) 4
Now, we focus on C corporations Form 1120 5
Beginning of ownership in corporation Tax consequences when taxpayer begins ownership of a corporation? For the business entity? No tax due when you buy shares. For the new owner buying shares? No tax due. Trade with another party, but neither party is economically better off. New owner records initial cost (e.g. stock price) as your beginning basis in your ownership asset. Previous owner selling the share may have a capital gain or loss on the sale of stock to the new owner. 6
Taxation of operations before distribution decisions Tax consequences as the business operates and has taxable profits or losses, before consideration of whether or not they make distribute any of the earnings (i.e. have a dividend) for shareholders: Business level tax on income as recognized under the accrual method typically like rules in Ch. 9. Some small corporations can use the cash method. But, we don’t focus on those. At the business level , may have ordinary losses at the end of a year are called “net operating losses” (NOLs) can apply them to future years’ (carry them forward) to ordinary income indefinitely but limited to offsetting 80% of taxable income in any given carryforward year The loss does NOT flow through to the specific shareholder’s tax return (so can’t be used to offset an individual owners’ other sources of income like wages). 7

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