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Unformatted text preview: Chapter C2 Formation of the Corporation Discussion Questions C2-1 A new business can be conducted as a sole proprietorship, partnership, C corporation, or S corporation. There are tax and nontax advantages and disadvantages to each form. See pages C2-2 through C2-7 for a listing of the tax advantages and disadvantages of each form. A comparison of the C corporation, S corporation, and partnership alternative business forms is contained in Appendix F. pp. C2-2 through C2-7. C2-2 Alice and Bill should consider forming a corporation and making an S election. An S election will permit the losses incurred during the first few years to be passed through to Alice and Bill and used to offset income from other sources. The corporate form allows them to have limited liability. Under the new check-the-box regulations, a noncorporate entity might elect to be taxed as a corporation and then make an S election. Such a possibility is unlikely to occur. As an alternative to incorporating, Alice and Bill might want to consider a limited liability company that is taxed as a partnership if their state laws provide for such an entity form. pp. C2-7 through C2-9. C2-3 The only default classification for the LLC is to be taxed as a partnership. Because the LLC has two owners, it can not be taxed as a sole proprietorship. The entity can elect to be taxed as a C corporation or an S corporation. If such an election is made, Sec. 351 applies to the deemed corporate formation that occurs when the election is made to be taxed as a C or S corporation. pp. C2-7 through C2-9. C2-4 The default classification for White Corporation is to be taxed as a C corporation. White Corporation can elect to be taxed as an S corporation if it makes the necessary election. The S election will cause the entity's income to be taxed to its owners. The S election is made by filing Form 2553 within the first 2 months of the corporation's existence (see Chapter C11). pp. C2- 7 through C2-9. C2-5 The only default classification for the LLC is to be taxed as a proprietorship. Because the LLC has only a single owner, it can not be taxed as a partnership. The entity can elect to be taxed as a C corporation or an S corporation. If such an election is made, Sec. 351 applies to the deemed corporate formation that occurs when the election is made to be taxed as a C or S corporation. pp. C2-7 through C2-9. C2-1 C2-6 Some suggested items for this debate include: PRO (Corporate formations should be taxable events): 1. A corporate formation is an exchange transaction; therefore, gains and losses should be recognized. 2. Making a corporate formation a taxable event increases tax revenues. 3. Simplification is achieved by eliminating one of the two options - whether a transaction is taxable or not. This change will make administration of the tax laws easier....
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- Spring '10