Chapter 2 Corporations - Organization - Chapter 2...

Chapter 2
Corporations:
Introduction and Operating Rules

Various Business Forms/Tax Entities
•
Sole proprietorships
•
Partnerships
•
S corporations
•
Regular corporations (also called C
corporations)
•
Limited Liability Companies
•
Trusts and estates

Business Entities
SOLE
PROPRIETOR-
SHIP
C
CORPORATION
PARTNERSHIP S
CORPORATION
LIMITED
LIABILITY
COMPANY
LIABILITY
ABILITY TO
RAISE
CAPITAL
TRANSFER-
ABILITY OF
OWNERSHIP
CONTINUITY

Business Entities-
Tax Considerations
SOLE
PROPRIETOR-
SHIP
C
CORPORATION
PARTNERSHIP S
CORPORATION
LIMITED
LIABILITY
COMPANY
TAX PAYING
ENTITY?
TAX FORM
TAX RATES

Sole Proprietorship
•
Not a separate taxable entity
•
Income reported on owner’s
Schedule 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 ( 1120s )

C Corporation
•
Separate tax-paying entity
–
Reports income and expenses on Form
Form 1120 (or Form 1120-A)
•
Income taxed at corporate level and
again at owner level when distributed as
a dividend

Dividends
•
Tax Relief Reconciliation Act of 2003
provides partial relief from double taxation of
corporate income
–
Generally, dividends received in taxable years
beginning after 2002 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 5% 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
$50,000 or less 15%
Over $50,000 but not over $75,000 25%
Over $75,000 but not over $100,000 34%
Over $100,000 but not over $335,000 39%
Over $335,000 but not over $10,000,000 34%
Over $10,000,000 but not over $15,000,000 35%
Over $15,000,000 but not over $18,333,333 38%
Over $18,333,333 35%

Nontax Issues in Selecting
Entity Form
(slide 1 of 3)
•
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

Nontax Issues in Selecting
Entity Form
(slide 2 of 3)
•
Transferability
–
Corporate stock is easily sold, but partners
must approve partnership interest transfer
•
Continuity of life
–
Corporations exist indefinitely

Nontax Issues in Selecting
Entity Form
(slide 3 of 3)
•
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