stanfield_504_16

stanfield_504_16 - 11/14/2011 Introduction to Entities:...

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11/14/2011 1 16-1 Introduction to Entities: General Tax and Nontax Factors 16-2 Introduction • Taxpayers must choose a form for a business entity • Choice is based on tax and non-tax factors 16-3 Non-Tax Factors Is the number of owners restricted? Do owners have limited liability? Can ownership interest be freely transferred? Do owners have a large degree of management control? Does entity continue regardless of ownership changes? Is there a high cost of organizing the entity? Does the entity have an ability to raise additional capital?
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11/14/2011 2 16-4 Sole Proprietorship The Owner: – Has unlimited liability – Can easily transfer ownership interest – Has full management control The Entity: – Ceases to exist when ownership changes – Has a low cost of formation – Has a limited ability to raise capital a business owned by one individual 16-5 Partnership The Owners : – Are fully liable (except for limited partners) – Cannot easily transfer ownership interest – Have full management control The Entity: – Ceases to exist if >50% ownership changes – Has a moderate cost of formation – Has a good ability to raise capital Exists when two or more persons engage collectively in a profit making activity 16-6 Corporation The Owners: – Have limited liability – Can easily transfer ownership interest – Have no right to direct management – Are not limited in number The Entity: – Continues to exist when ownership changes – Has a relatively high cost of formation – Has an excellent ability to raise capital an artificial entity created under the statutes of state law
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11/14/2011 3 16-7 S Corporation The Owners: – Have limited liability – Can easily transfer ownership interest – Have no right to direct management – Are limited to a maximum number of 100 The Entity: – Continues to exist when ownership changes – Has a relatively high cost of formation – Has an excellent ability to raise capital a regular corporation with special tax attributes 16-8 • Requirements for electing S status – No more than 100 shareholders – Shareholders must be individuals, estates, tax-exempt organizations, or certain trusts – Shareholders may not be nonresident aliens – Only one class of outstanding stock is allowed – All shareholders must consent to election S Corporation Election 16-9 S Corporation Election Termination • Terminating election – May be voluntarily terminated by consent of > 50% of shareholders – Involuntary termination occurs when any requirements are violated • Must wait 5 years before applying for S status again
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stanfield_504_16 - 11/14/2011 Introduction to Entities:...

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