first - Week 1 Chapter 1 questions 4,5,10,14,15,16,17 4....

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Week 1 Chapter 1 questions 4,5,10,14,15,16,17 4. What are the main advantages and disadvantages of organizing a firm as a corporation? There are several advantages as well as disadvantages. The main advantage of a corporate structure are that the owners face limited liability – the extent of their liability is their initial investment (in a sole proprietorship or partnership the owner(s) face unlimited liability). Also, a corporate structure allows a firm to survive the death of an owner whereas a sole-proprietorship ceases to exist if the owner dies. There are several disadvantages as well. Most notably that the firm’s earnings are subject to double taxation – taxation as corporate income and then again as household income. They are also more difficult to set up. 5.Explain the difference between an S and a C corporation. An S corporation operates much like a partnership; no taxes are paid by the partnership or the S corporation. Income and losses are passed through to the shareholders on a current basis and the shareholders report on their personal income tax returns, as income, their pro-rata share of profits and losses (except losses are limited to the shareholder's basis in his or her stock or debt). Generally, the corporation pays no tax; however, in California there is an S corporation tax of 1.5% on its taxable income. A C corporation is a separate tax paying entity with its own tax rates. The C corporation files a tax return and pays the tax on its profits. If the C corporation then distributes its earnings to its shareholders, the shareholders take that amount into income as dividends, creating a double taxation. Start-up corporations generally have losses in the first few years of operation, and by electing S Corporation status the shareholders will receive those losses as individuals.
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This note was uploaded on 05/10/2011 for the course STATS 202 taught by Professor Emil during the Spring '11 term at Aberystwyth University.

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first - Week 1 Chapter 1 questions 4,5,10,14,15,16,17 4....

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