12 - 1 Chapter 12 Business Entities Copyright© 2011 Money...

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Unformatted text preview: 1 Chapter 12 Business Entities Copyright© 2011 Money Education, LLC Chapter 12 Business Entities 2 One of the most important decisions new business owners will make is the selection of the entity type to be used for conducting the business activities of the enterprise. The most common legal forms of business used in the United States include: • Sole proprietorship • General and limited partnerships • Limited liability partnerships (LLC) • C corporation • S corporation Copyright© 2011 Money Education, LLC Chapter 12 Business Entities 3 The selection process includes consideration of the following factors: • Ease and cost of formation • Complexity of management and governance • How transferability and dissolution are achieved • Liability protection for owners’ personal assets • Reporting requirements and taxation Chapter 12 Copyright© 2011 Money Education, LLC Sole Proprietorships 4 Sole proprietorships are business ventures owned and operated by a single individual. A sole proprietorship can operate under the name of the owner. It can conduct business under a trade or fictitious name. No filings are required with the Secretary of State. No annual filing fees are required. There is no transfer of assets to the entity because the entity is considered a legal extension of the proprietor. Copyright© 2011 Money Education, LLC Chapter 12 Sole Proprietorships 5 Copyright© 2011 Money Education, LLC Chapter 12 Sole Proprietorships 6 Income Taxation and Payroll (Social Security) Taxes • The cost of tax compliance is low. • The proprietor conducts business under his own Social Security number. • A sole proprietor does not have to pay unemployment taxes on himself. • He must pay unemployment taxes for his employees. • The proprietor does pay self-employment tax (up to 15.3 percent) on his own earnings and one-half of Social Security taxes for his employees. Chapter 12 Copyright© 2011 Money Education, LLC Sole Proprietorships Taxation 7 Taking Deductions • The proprietor can deduct all ordinary and necessary business expenses from gross income. Employer Deduction for Retirement Plans • The proprietor can usually deduct contributions made to a qualified plan for employees, including those made for the proprietor. • The contributions (and the attributable earnings and gains) are generally not taxed to the employee until distributed by the plan. • The deduction for contributions to a defined contribution plan cannot exceed 25 percent of the compensation paid. • The proprietor must reduce this limit in figuring the deduction for contributions made to his own account. • The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. • In the case of an employer who maintains both a defined benefit plan and a defined contribution plan, the funding limit set forth is combined. • The maximum deductible amount is the greater of 25 percent of the aggregate covered compensation of employees or the required minimum funding standard of the defined benefit plan. Copyright© 2011 Money Education, LLC Chapter 12 General Partnerships 8 Partnerships are joint business ventures among two or more persons or entities to conduct a business as co-owners under their names or under a trade or fictitious name. Copyright© 2011 Money Education, LLC Chapter 12 Limited Partnerships (LP) 9 Limited partnerships are associations of two or more persons as co- owners to carry on a business for profit except that one or more of the partners have limited participation in the management of the venture and thus limited risk exposure. Chapter 12 Copyright© 2011 Money Education, LLC Limited Liability Partnership (LLP) 10 A limited liability partnership (LLP) is a hybrid entity that provides partial liability protection to its members and may be taxed as either a corporation or partnership. Copyright© 2011 Money Education, LLC Chapter 12 Family Limited Partnership (FLP) 11 A family limited partnership (FLP) is a special type of limited partnership created under state law with the primary purpose of transferring assets to younger generations using annual exclusions and valuation discounts for minority interests and lack of marketability. Copyright© 2011 Money Education, LLC Chapter 12 Family Limited Partnership (FLP) 12 A family limited partnership (FLP) is a special type of limited partnership created under state law with the primary purpose of transferring assets to younger generations using annual exclusions and valuation discounts for minority interests and lack of marketability. Chapter 12 Copyright© 2011 Money Education, LLC Limited Liability Companies (LLC) 13 Limited Liability Companies (LLC) are separate legal entities formed by one or more individuals by meeting state statutory requirements necessary for the formation of an LLC. Copyright© 2011 Money Education, LLC Chapter 12 Limited Liability Companies (LLC) 14 Copyright© 2011 Money Education, LLC Chapter 12 C Corporations 15 Corporations are chartered legal entities formed by one or more individuals by meeting state statutory requirements necessary for the formation of a corporation. Chapter 12 S Corporations 16 An S corporation is normally created under state law by first forming a C corporation and then filing an “S” election with the IRS. Chapter 12 ...
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This note was uploaded on 02/27/2012 for the course FIN 132 taught by Professor Afda during the Spring '12 term at Centenary College New Jersey.

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