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