chapter_2_notes - 2-1Chapter 2 Corporations: Introduction...

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Unformatted text preview: 2-1Chapter 2 Corporations: Introduction and Operating Rules (2012) updated: August 8, 2011Learning Objectives: Identify some of the advantages and disadvantages of various forms of conducting a business. Compare the taxation of individuals and corporations similarities & differences. Review the tax rules unique to corporations. Understand the corporate income tax formula & compute the corporate income tax. Understand the major differences between corporate taxable income and financial accounting income. I. Business Entity Choices A. Sole proprietorship B. Partnership 1. General 2. Limited 3. Limited liability partnership (LLP) 4. Limited liability company (LLC) C. Corporation 1. Regular C corporations 2. Subchapter S corporations (S-corps) Note: For more information see Business Entities Matrix(chapter 2 web page). 2-2D. The choice of entity should be based on a combination of tax and nontax factors. 1. tax factors include: Is it a tax-paying or tax-reporting entity (flow-thru entity)? Can the owner be treated as an employee? If yes, can the entity deduct salary and/or other fringe benefits paid to owner? When is income taxed? When earned by entity or when distributed to owners? The top corporate rate is 35% (39% on a limited range of taxable income), as is the top rate for individuals. However, the owner may be able to shelter some income at the lower corporate tax rates of 15 and 25-percent. The tax rate on qualified dividends and long-term capital gains must also be considered. And the uncertainty will the 15/0% rates continue? Character. With pass-through entities, separately stated income, expenses, and losses retain their character for the owner. C corporation items do not pass through especially losses (losses are trapped inside the corporation). 2. nontax factors may override tax considerations: liability limited vs. unlimited ability to raise larger amounts of capital continuity of life for the entity free transferability of ownership interests centralized management 2-3II. Sole proprietorship A. Advantages: 1. entity not subject to separate tax income is reported on owners Schedule C which flows thru to owners individual Form 1040 2. owner can contribute/withdraw assets without tax consequences 3. losses can be used to offset other sources of income (subject to some limitations) B. Disadvantages: 1. all profits are taxed to owner when earned even if not distributed 2. sole proprietor cannot be an employee of the business (cant deduct salary and fringe benefits) 3. unlimited liability 4. business profits are subject to self-employment taxes as well as federal income taxes (and most likely state income taxes) 2-4III. Partnership A. Advantages: 1. are not subject to separate tax partnership files an information return Form 1065 and Schedule K (and provides a K-1 to each partner) 2. partners can usually contribute/withdraw assets without tax consequences...
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chapter_2_notes - 2-1Chapter 2 Corporations: Introduction...

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