Corporate and Partnership Taxation and Entity Selection

Question 1

General Partnership

Answer 1

No limitation on liability. In partnerships the partners have capital accounts, whereas in corporations the stockholders hold their equity interest in stock.

Question 2

Limited Partnership

Answer 2

Limited Partners have limited liability.

Question 3

PARTNERSHIPS ARE PASSTHROUGH ENTITIES:

Answer 3

Income from the partnership is taxed at the partner’s individual rate, distribution of cash is irrelevant. You still have to pay taxes on the partnership income even if it is not distributed to you.

Question 4

Limited Liability extends to who in a corp?

Answer 4

Shareholders and directors have limited liability.

Question 5

Tax Loss Rules for Partnerships & Corporations

Answer 5

Partnership

• Losses/deductions passed through to partners.
• Reduce partner income in year loss incurred by partnership

Corp

• Losses/deduction usable only usable at corp level
• Corporate losses cannot be deducted on the individual’s income tax.
• Can be carried over to future

Question 6

Corporate Double Tax

Answer 6

The corporation gets taxed upon earning the money, and then the shareholders pay a 15% capital gains tax when the dividends are distributed.

Question 7

Selling Shares

Answer 7

When a shareholder sells their shares they pay 15% capital gains on the difference between what they paid for the stock and what they sold the stock for.

Question 8

Corporate Tax Accounting

Answer 8

• Corp pays tax on income and SH on dividends

1. Tax the income - pay the corporate tax
2. The remaining gets split between A and B
3. When the corp distributes money in a dividend it is further taxed (SH paying)
   
   • Better tax rate than the corporate tax rate
4. Instead of doing divends, you can sell shares, but will still be taxed at about the same rate as with dividends

Question 9

Partnership Tax Accounting

Answer 9

• Partnerships do not pay tax

1. Distribute income to partners
2. They pay 0 tax on the distribution
3. The partners only pay tax on the earnings

Question 10

“C” CORPORATIONS AND “S” CORPORATIONS:

Answer 10

As far as corporate law is concerned there is no distinction between C and S corporations. This is simply a tax election if they make the “S” election they are taxed pass-through like a partnership. There are limitations on S Corps: Must be less than 100 natural persons, must be US citizens.

Question 11

LLC

Answer 11

Limited Liability Company. Owners are members and are entitled to limited liability. Can elect to be taxed as an entity, or an aggregate like a partnership. It can be managed by the members, or outside managers can be appointed to manage it.

Question 12

LLP

Answer 12

Limited Liability Partnership: A general partnership that files a certificate of limited liability with the secretary of state. Governed by state law. In some states the partners are only protected from tort claims arising out of another partner’s conduct. In some states the LLP also provides protection from a contract creditor of another partner.

Question 13

LLLP

Answer 13

Limited Liability Limited Partnership: This is a limited partnership that files a certificate of limited liability. It protects the general partner from liability for other partners torts. In states that allow protection for contracts for LLP’s LLLP’s enjoy the same protection.

Question 14

Corporate Veils and LLC

Answer 14

For the purposes of piercing the corporate veil, there is no law or policy that would require treating limited liability companies (LLC’s) different from corporations.

Question 15

Agency & LLCs

Answer 15

• The agent has to disclose the full identity and capacity of the principal
  
  • Have to tell if you are LLC or PPI
• Without full disclosure, no corporate protection and then individuals are liable under agency law

Question 16

Liability for an LLC

Answer 16

• As a general rule LLC members are not liable for the debts of the LLC unless the veil can be pierced.
• Much like a corporation, certain formalities have to be observed in the creation, operation, and dissolution of an LLC.
• Members of an LLC can be held personally liable for the debts of their LLC if they fail to properly dissolve the LLC under the relevant statutes.
• Thus an LLC must Wind up properly and maintain records for limited liability