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Tax Planning > Characteristics and taxation of business entities > Flashcards

Characteristics and taxation of business entities Flashcards

1
Q

What are the legal forms of business organizations?

A

Sole proprietorship

General partnership

Limited partnership

Limited liability partnership (LLP)

Limited liability company (LLC)

Corporation

S corporation

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2
Q

What is a sole proprietorship?

A

Owned and controlled by one person who is personally liable for all debts and claims against the business

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3
Q

What are the advantages of sole proprietorship?

A

Simplicity

Not costly to establish

Can respond quickly to business opportunities

Easy to terminate

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4
Q

What are the disadvantages of sole proprietorship?

A

Not easy to raise capital

Unlimited liability

Terminate upon death or in capacity

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5
Q

What is the taxation of a sole proprietorship?

A

Tax directly to the owner

Must include a schedule C and his individual tax return (for 1040)

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6
Q

Partnership is treated as an entity that is separate from what

A

Apart from its individual members for certain purposes

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7
Q

What is the basis and partnership interest?

A

Partners basis in the partnership interest begins with contributions and subsequently adjusted by earnings and losses

Cash contributions - basis equal value of cash contributed

Property contribution - it’s carryover basis

Distribution to partners will reduce basis

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8
Q

What is the taxation of partnerships?

A

Flow through/conduit entities for purposes of federal income tax taxation

Items of income and deduction will be reported to the partner on his individual federal income tax return 1040

Items of income and deduction are reported on schedule K at the federal partnership return (form 1065) and will be reported to the partners on schedule K-1

Each partner receives a schedule K-1 that includes their share of allocation of each item up income and deduction

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9
Q

What is the basis in partnership interest of a limited partnership?

A

Same as for a general partnership

Cash contributions equal to the value of the cash

Property contributions - carryover basis

Cash of property distributions to partners will reduce basis

Partners basis is also decreased by any share of his liabilities assumed by the partnership

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10
Q

Limited partnerships

What is the liability of partners to creditors?

A

Limited partner - Liable only to the extent of that partners contributed or promised capital

General partner - has unlimited personal liability to creditors

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11
Q

Limited partnerships

Does a limited partner have the authority to buy the partnership

A

No, only the general partner

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12
Q

Limited partnership

What is the taxation of limited partnerships?

A

They are taxed under the same concepts as a partnership

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13
Q

What is a family limited partnership (FLP)?

A

A partnership with a general partner, and at least one limited partner

To address several purposes

Convenient administration of investments while retaining control

A vehicle for annual gift transfer tax planning purposes

Provide for protection for limited partners

Senior family member who transfers businesses, or investment assets to the partnership

General partner has significant control over the business activities of the partnership makes investment and management decisions and determines when distribution should be made to the limited partners , senior family member serves as general partner

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14
Q

Family limited partnership

What are its advantages?

A

Significant impact in reducing a transfer and potential state tax

Can take advantage of gift and a state tax valuation rules relating to minority interest and market ability that can reduce transfer taxes

Partnership typically will have a value approximately 30% less than the value of the assets originally transferred to the partnership

Actual discounts can range from 25% to 60%

Ability of the general partner to make substantial gifts yet maintain control of the partnership assets

Continuing control of income from transfer assets because distributions from a family limited partnership must be authorized by general partners

Identification of partnership assets as separate assets and not marital assets in the event of a divorce

Control of the future investment of family assets

Reduce probate cost with respect to real estate located another states - no ancillary administration is required

Enhancement of family communication on family business, and investment matters

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15
Q

What is a corporation?

A

Business corporation are artificial, legal entities, whose creation and operations are controlled by state statutes

Is regarded as a person who is separate from the shareholders

Shareholders have equitable interest , but not legal title to corporate property

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16
Q

Corporations

What are some of the tax considerations for corporations and shareholders?

A

Profits are taxed to the corporation at special corporate rates

Distributions of prophets , in the form of dividends, treated as taxable income to the recipient shareholders, and are not deductible by the corporation (double taxation of profits)

17
Q

Corporations

What are some of the special taxes applicable to C corporations?

A

Personal holding company tax

Personal service corporation tax

Accumulated earnings tax

Taxes are paid by the corporation

Dividends received deduction - refers to a reduction the taxable amount of a dividend received by a corporation based on his ownership in another corporation

18
Q

Corporations

What is the personal holding company tax?

A

Objective of the personal holding company tax is to discourage individual taxpayers from using the corporate entity solely for tax avoidance

19
Q

S corporations

What is the maximum number of shareholders for an S corporation?

A

100

20
Q

S corporation

How does the IRS treat S corporation shareholders?

A

As partners

Are required to report pro rata shares of corporate items that flow through to them

21
Q

S corporations

Partnerships have great flexibility in the allocation of income and deduction is this advantage available to as corporations

A

Not as much flexibility

22
Q

S corporation

What is the principal advantage of an S corporation?

A

Avoidance of double taxation associated with C corporations

23
Q

S corporation must file an annual return on form what?

A

1120 S

24
Q

S corporations

For purposes of the IRC fringe benefit provisions, an S corporation is treated as a partnership, and a shareholder employee who owns more than 2% of its stock is treated as what?

A

Partner

25
Q

S corporations

Accident and health insurance premiums paid by and S corporation is treated as what ?

A

For more than 2% shareholder employee, our deductible by the corporation and are included in the shareholders, gross income

100% of the amount included in income, may be deducted by the shareholder employee

26
Q

S corporation

Who made the shareholders be?

A

Individuals, estates, certain trust, or certain tax exempt organizations. Partnerships and corporations may not be shareholders.

Only citizens or residents of the United States maybe shareholders

27
Q

S corporation

How many classes of stock issued and outstanding can an S corporation have?

A

One class of stock issued and outstanding

The rights of the holders must be identical with regards to profits and assets of the corporation

However, two classes are permitted if the only difference is voting rights

28
Q

S corporations

How is the election made to be an S corporation?

A

Is elected by having all shareholders, consent and file form 2553

29
Q

Limited liability company (LLC)

What is it?

A

An entity where the owners have limited liability for debts and claims of the business, even while participating in management

One of the most versatile types of entities

Provides a limited liability to its members and allows great flexibility regarding the taxation of the entity

30
Q

Limited liability company (LLC)

What is the taxation?

A

Under the IRS “check the box” regulation, an LLC can be taxed as any of the following

Sole proprietorship

Partnership

C corporation

S corporation

Tax Planning (18 decks)

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