Characteristics and taxation of business entities Flashcards
What are the legal forms of business organizations?
Sole proprietorship
General partnership
Limited partnership
Limited liability partnership (LLP)
Limited liability company (LLC)
Corporation
S corporation
What is a sole proprietorship?
Owned and controlled by one person who is personally liable for all debts and claims against the business
What are the advantages of sole proprietorship?
Simplicity
Not costly to establish
Can respond quickly to business opportunities
Easy to terminate
What are the disadvantages of sole proprietorship?
Not easy to raise capital
Unlimited liability
Terminate upon death or in capacity
What is the taxation of a sole proprietorship?
Tax directly to the owner
Must include a schedule C and his individual tax return (for 1040)
Partnership is treated as an entity that is separate from what
Apart from its individual members for certain purposes
What is the basis and partnership interest?
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
What is the taxation of partnerships?
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
What is the basis in partnership interest of a limited partnership?
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
Limited partnerships
What is the liability of partners to creditors?
Limited partner - Liable only to the extent of that partners contributed or promised capital
General partner - has unlimited personal liability to creditors
Limited partnerships
Does a limited partner have the authority to buy the partnership
No, only the general partner
Limited partnership
What is the taxation of limited partnerships?
They are taxed under the same concepts as a partnership
What is a family limited partnership (FLP)?
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
Family limited partnership
What are its advantages?
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
What is a corporation?
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
Corporations
What are some of the tax considerations for corporations and shareholders?
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)
Corporations
What are some of the special taxes applicable to C corporations?
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
Corporations
What is the personal holding company tax?
Objective of the personal holding company tax is to discourage individual taxpayers from using the corporate entity solely for tax avoidance
S corporations
What is the maximum number of shareholders for an S corporation?
100
S corporation
How does the IRS treat S corporation shareholders?
As partners
Are required to report pro rata shares of corporate items that flow through to them
S corporations
Partnerships have great flexibility in the allocation of income and deduction is this advantage available to as corporations
Not as much flexibility
S corporation
What is the principal advantage of an S corporation?
Avoidance of double taxation associated with C corporations
S corporation must file an annual return on form what?
1120 S
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?
Partner
S corporations
Accident and health insurance premiums paid by and S corporation is treated as what ?
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
S corporation
Who made the shareholders be?
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
S corporation
How many classes of stock issued and outstanding can an S corporation have?
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
S corporations
How is the election made to be an S corporation?
Is elected by having all shareholders, consent and file form 2553
Limited liability company (LLC)
What is it?
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
Limited liability company (LLC)
What is the taxation?
Under the IRS “check the box” regulation, an LLC can be taxed as any of the following
Sole proprietorship
Partnership
C corporation
S corporation
