C11-Chp-13-1-Comparing_Organizations

C11-Chp-13-1-Comparing_Organizations - Chapter 13 Comparing...

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Unformatted text preview: Chapter 13. Comparing Organizations. Howard Godfrey, Ph.D., CPA Professor of Accounting Copyright 2009 Choice of Form of Business Entity • Many factors affect the choice of business entity – Both tax and nontax – Understanding the comparative tax consequences related to the different types of entities is important for effective tax planning Forms of Doing Business • Sole Proprietorship • Partnership Limited liability co (LLC) • C corporation • S corporation Limited Liability Company (LLC) Hybrid business form that combines the corporate characteristic of limited liability for owners with tax characteristics of a partnership Filing Requirements Proprietorship Files Schedule C, Form 1040 Partnership & LLC File Form 1065 C Corporation Files Form 1120 S Corporation Files Form 1120S Nontax Factors—Capital Formation Proprietorship Limited ability to raise capital Partnership • Can raise funds through pooling of owner resources • Ltd. partnership can raise capital from investors C Corporation • Greatest ease and potential for raising capital S Corporation • Greatest ease and potential for raising capital, but limited number of investors Nontax Factors—Limited Liability Proprietorship Unlimited liability Partnership General partners are jointly and severally liable Ltd. Partner’s liability is limited to investment C Corporation Generally have limited liability S Corporation Generally have limited liability Other Nontax Factors • Estimated life of business • Number of owners and their roles in management • Freedom of choice in transferring ownership interests • Organizational formality and related costs Single vs. Double Taxation Proprietorship Single taxation Partnership Single taxation C Corporation Double taxation (unless you have policy of not paying dividends) S Corporation • Generally, single taxation • May be subject to built-in gains tax and passive investment income tax Jan is single with no dependent. Jan has an office supply business. She has these annual results: Sales $1,000,000 Operating expenses (800,000) Net income $200,000 Jan will incorporate the business. She will draw a salary of $100,000. All after-tax earnings will be invested in growth of corporation. Do your recommend an S election? Suppose there will be losses. Alternative Minimum Tax Proprietorship Directly subject to AMT Partnership • Indirectly subject to AMT • AMT adjustments & preferences flow through and partners subject to AMT C Corporation • Directly subject to AMT • May have advantage here since corp AMT rate is only 20% S Corporation • Indirectly subject to AMT • AMT adjustments & preferences flow through and S/ H’s subject to AMT Controlling the Entity Tax • Various techniques can be used to control the tax liability, whether imposed on the entity or owners, such as: – Distribution policy (dividends?) – Recognizing the interaction between the regular tax liability and the AMT liability – Utilization of special allocations – Fringe benefits – Minimizing double taxation On 1-1-08, Jan invested $200,000 in Concord Corp.On 1-1-08, Jan invested $200,000 in Concord Corp....
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This note was uploaded on 03/09/2012 for the course ACCT 6120 taught by Professor Godfrey,h during the Spring '08 term at UNC Charlotte.

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C11-Chp-13-1-Comparing_Organizations - Chapter 13 Comparing...

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