Chapter 9_Lecture - Chapter 9 Corporations: Organization,...

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Chapter 9 Corporations: Organization, Capital Structure, and Operating Rules Various Business Forms Sole proprietorships Partnerships Trusts and estates S corporations Regular corporations (also called C corporations) Sole Proprietorship Not a separate taxable entity Income reported on owner’s Sch. C Partnership Separate entity, but does not pay tax Allocates partnership income to partners Partners report partnership income on personal tax returns Files information return (Form 1065) S Corporation Separate entity, only pays special taxes (e.g., built-in gains) Allocates entity income to shareholders Shareholders report entity income on personal tax return Files information return (Form 1120S) C Corporation Separate tax-paying entity Reports income and expenses on Form 1120 Income taxed at corporate level and again at owner level when distributed as a dividend Dividends Double taxation stems, in part, from the fact that dividend distributions are not deductible by the corporation To alleviate some of the double taxation effect, Congress reduced the tax rate applicable to dividend income of individuals for years after 2002 Generally, dividends are taxed at same marginal rate applicable to a net capital gain Thus, individuals otherwise subject to the 10% or 15% marginal tax rate pay 0% tax on qualified dividends received Individuals subject to the 25, 28, 33, or 35 percent marginal tax rate pay a 15% tax on qualified dividends Corporate Income Tax Rates
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Nontax Issues in Selecting Entity Form Liability Sole proprietors and some partners have unlimited liability for claims against the entity Capital-raising Corporations and partnerships to a lesser extent can raise large amounts of capital for entity ventures Transferability Corporate stock is easily sold, but partners must approve partnership interest transfer Continuity of life Corporations exist indefinitely Centralized management Corporate actions are governed by a board of directors Partnership operations may be conducted by each partner without approval by other partners Limited Liability Companies (LLC) LLCs have proliferated since 1988 when IRS ruled it would treat qualifying LLCs as partnerships Major nontax advantage Allows entity to avoid unlimited liability Major tax advantage Allows qualifying business to be treated as a partnership for tax purposes, thereby avoiding double taxation associated with C corporations Entity Classification After 1996 Check-the-box Regulations
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Allows taxpayer to choose tax status of entity without regard to corporate or noncorporate characteristics Entities with > 1 owner can elect to be classified as partnership or corporation Entities with only 1 owner can elect to be classified as sole proprietorship or as corporation Check-the-box Regulations (cont’d) If no election is made, multi-owner entities treated as partnerships, single person businesses treated as sole proprietorships Election is not available to: Entities incorporated under state law, or Entities required to be corporations under federal law (e.g., certain publicly traded
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This note was uploaded on 03/23/2010 for the course ACC 410 taught by Professor Su during the Spring '10 term at University of Nevada, Las Vegas.

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Chapter 9_Lecture - Chapter 9 Corporations: Organization,...

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