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Unformatted text preview: 213 Chapter 14 Taxation of Corporations Basic Concepts SUMMARY OF CHAPTER Corporation taxation is divided into six areas. They are (1) formation, (2) operation, (3) distributions, (4) redemptions, (5) liquidations, and (6) reorganizations. This chapter focuses on the formation and operation of corporations. Entity Choice 14,001 Specific Entities A major concern when forming a business is the type of entity. The three major types are sole proprietorships, partnerships, and corporations. Each entity has certain tax and nontax advantages and disadvantages. A sole proprietorship is a form of business in which one person owns all the assets and is fully responsible for all the liabilities. A partnership is a form of business in which two or more persons or entities own all the assets and are responsible for the liabilities. It is based on a voluntary contract between these parties. A corporation is a legal entity created by the authority of state law. It is separate and distinct from its owners and may be owned by one or more persons or entities. There are advantages of each type of entity. Corporations have limited liability, owners can have employee status, corporations usually can raise funds more easily than can partnerships and sole proprietorships, and corporations can have a tax year different from their owners. However, regular corporations produce double taxation and do not pass through tax attributes (e.g., losses, credits, etc.) to their owners. 14,015 Definition of a Corporation A corporation is a legal entity owing its existence to the laws of the state in which it is incorporated. The state laws define all legal relationships of the corporation. New Regulations to Code Sec. 7701 issued in 1996 and effective January 1, 1997, simplified the entity classification issue. Under the new check-the-box system, certain business entities (entities other than trusts or those subject to special rules) automatically will be treated as corporations for federal tax purposes. These entities are: firms incorporated under federal or state law, associations, joint-stock companies or joint-stock associations (as organized under a state statute), insurance companies, banks, business entities wholly owned by a state or political subdivision of the state, business entities taxed as corporations under another Code section, and certain foreign entities. Eligible entities (entities other than trusts or those subject to special rules) that are not automatically treated as a corporation may elect (check-the-box) to be treated as a corporation for federal tax purposes. Organization of and Transfers to a Corporation 14,101 Use of Corporate Form If the corporate form is desired, the owners must be certain they meet all the filing requirements of the state in which the company is organized. Next the owners must decide what type of property to transfer to the corporation and how this property should be transferred. In general, taxpayers who exchange property other than cash forand how this property should be transferred....
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This note was uploaded on 10/23/2009 for the course ACCTG 16 taught by Professor Juliekim during the Summer '09 term at Santa Monica.
- Summer '09