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Chapter 13 Fall 2011 - ACCT 403 CHAPTER 13 FALL 2011...

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ACCT 403 CHAPTER 13 – FALL 2011 BUSINESS ENTITIES - GENERAL DIFFERENCES I. Types of Entity and Nontax Factors A. Types of Entities 1. Sole Proprietorships a. Defined as an unincorporated business with one owner. b. The company’s revenue and deductions are reported in Schedule C. c The net income or loss from Schedule C is reported on line 12 of Form 1040. 1. If there is a loss, it is deductible against other sources of income. 2. Corporations a. Separate legal entity. b. C Corporations report their revenue and expenses on Form 1120 and pay their own taxes. a. MTRs range from 15% to 35%. 3. Pass through entities a. A pass though entity means that the income earned by the business “passes through” to the owners where each owner reports his or share of the entity’s income on his or her tax return. b. The share of “ordinary” income for an individual is reported on page 2 of Schedule E, which in turn is reported on line 17 of Form 1040. c. Partnerships and S Corporations are pass through entities. 4. Limited liability Companies (LLCs) or Partnership (LLP) a. An LLC or is an unincorporated business which may be treated as a partnership, S Corporation, sole proprietorship, or C Corporation. 1. It therefore is not really a “taxable entity” with its own distinct tax provisions. 5. General tax comment a. While most of the tax provisions apply in the same way to the above entities (such as gross income, business deductions, depreciation), there are distinct tax provisions that apply only to partnerships, S Corporations, and C Corporations. B. Nontax Factors 1. Limited liability a. Corporate shareholders are protected from personal liability from creditor’s claims against the corporation.
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2 1. From a practical standpoint, financial institutions may not lend money to a closely-held corporations without guarantees by the shareholders so this feature may not be as beneficial when deciding which entity to form. 2. LLC members are protected from other debts of the business as well as lawsuits against the business (unless the damages resulted from the member’s negligence). b. Sole proprietorships and general partners in a partnership may have unlimited liability unless the business creates an LLC or LLP. 1. See Examples 8 and 9 (pages 9-10) for LLC and LLP liability protection. c. Contrast Examples 2-4, pages 6-7. 2. Size a. Traditionally, the size of corporations may be much larger than partnerships or S Corporations (100 share limit for the latter). b. Limited partnerships can be large but generally there are much fewer owners than large corporations. 1. A limited partnership has at least one limited partner and one general partner. 2. As in the case of corporations, a limited partner is protected from personal liability from creditor’s claims against the partnership.
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