Entities (Lesson 5) Flashcards
In the section process what factors are considered
- 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
Are entities formed under state or federal law
- state law
What must a limited liability entity do under state law to help keep the liability protection
- in a clearly and identifiable manner let the public know of the liability protection
- marking on business correspondence such as invoices, letterhead, business cards and through markings on vehicles with the name of the company and LLC
What happens if the company fails to identity in contracts and correspondence of their liability protection
- a court could pierce the veil of liability protection or disregarding the legal status of the entity
What is a sole proprietorship
- business ventures owned and operated by a single individual
Are any filings required with the state for a sole proprietorship
no
Are any assets transferred for legal consideration in a sole proprietorship
no
How is the formation of a sole proprietorship
- Easy and inexpensive
- if collecting sale tax it must register with the state or local taxing authority
- Operation is easy in that all decisions are made by the proprietor
- any trade names or assets are owned by the individual proprietor
How is the interest, disposal of interest, and dissolution handled for a sole proprietorship
- Proprietor has a 100 percent interest in the proprietorship asset and income
- relatively easy to sell assets but it does require finding a buyer
- Dissolution is achieved by simply discontinuing business operations and pay creditors or by the death of the proprietor
How is a sole proprietorship disposed
- Dissolution is achieved by simply discontinuing business operations and pay creditors or by the death of the proprietor
How is capital handles in a sole proprietorship
- capital for a proprietorship is limited to the resources of the proprietor including the proprietors ability to borrow
What is the liability for a sole proprietorship
- sole proprietorship legal liability
- sole proprietor is personally legally liable for the debts and torts the proprietorship
How is the management/operations of a sole proprietorship handled
- proprietor has the day to day management and decision making responsibilities including the hiring and firing of employees
- no guarantee of continuity beyond the proprietor
How is the tax compliance for a sole proprietorship
- cost of tax compliance is low
Does a sole proprietor have to pay unemployment tax on themselves
- no just their employees
How do you calculate maximum contribution to a Keogh plan for a sole proprietor
- Calculate the self employed individuals contribution rate
- Calculate the self employment tax
- Calculate the self employed individuals contribution
How do you calculate the self employed contribution rate
SECR = Contribution rate to other participants/ 1+ Contribution rate to other participants
How do you calculate the net earnings subject to self employment tax
- Net self employment income * 92.35%
- 100% - 6.2% - 1.45% = 92.35%
How do you calculate the self employment tax
Net Earnings subject to Self Employment Tax Times:
12.4% up to $142,800 (6.2% x 2 = 12.4%)
Plus: 2.9% on all income (1.45% x 2 = 2.9%)
Equals: Self Employment Tax
How do you calculate the self employed individuals contribution to a Keogh plan
Net Self employment Income Less:
1/2 of Self employment tax
Equals: Adjusted Net Self Employment Income
Times: Self Employed Contribution rate
Equals: Self Employed Individuals Qualified Plan Contribution
What is the maximum contribution to a Keogh plan for employees
25%
What are the advantages of a Sole proprietorship
- Easy to form
- Simple to operate
- easy to sell business assets
- few administrative burdens
- income is generally passed through to the owner on Schedule C
What are disadvantages of a Sole Proprietorship
- Generally have limited sources of capital
- unlimited liability
- no guarantee of continuity beyond the proprietor
- business income is subject to self employment tax
When is a partnership automatically created
- when two or more individuals conduct business for a profit
Are general partnerships required to registered with the secretary of state of formation
- No but limited partnerships are required to register
Is a partnership usually easy to disposed
- Hard to dispose because any buyer will not only have to evaluate the business but also the other partners
- Partnership agreements usually have an approval process for selling a partnership interest
When is judicial dissolution of a partnership necessary
- when the partners cannot agree on how to conduct the business or whether to dissolve the entity
How is the capital portion of a partnership treated
- Capital contributed usually determines the ownership interest of the partner
- can be allocated differently though
How is the liability handled for a partnership
- co owner partners share the risk and rewards of the business
- each partner is jointly and severally liable for the partnership obligations
What is a principal disadvantage of a general partnership agreement involving liability
- all general partners in a partnership are subject to joint and several liability for the debts and obligations of the partnership
How is the management of a partnership treated
- partnerships are generally managed equally by all partners
- managing partner can be named
How are partnerships taxed
- No subject to entity level taxation
- business net income is subject to self employment tax up to 15.3%
- required to obtain a EIN
How is a partner contributing personal or professional services to the partnership taxed
- partner must recognize ordinary compensation income for the value of the services
- amount of income recognized becomes the partners basis in the partnership
What are the tax ramifications of a business operating as a partnership
- Must file 1065
- each partners share of income and expenses is reported on K-1
- Partners adjusted basis in the partnership is adjusted each year to reflect the allocated items of income and expense (Increase by income/decreased by losses, distributions, and nondeductible expenses)
What are the tax ramifications of withdrawals or distributions from a partnership
- withdrawal is treated as a return of capital and reduces the partners adjusted basis
- a partner with a basis of zero any additional withdrawals taken from the partnership will result in a capital gain to the partner
What are the advantages of a Partnership
- more sources of initial capital
- usually have more management resources available than proprietorships
- fewer administrative burdens than corporations
- income and losses are generally passed through to the partners for tax purposes
What are disadvantages of a partnership
- transfer of interest is more difficult than proprietorships
- unlimited liability
- income tax and basis adjustments rules can be complex
- business net income is subject to self employment tax
- partners are entitled to few tax free fringe benefits that are generally available to employees
What is a limited partnership
- 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
- usually at least one general partner
What happens if a limited partner participates in the management
- becomes a general partner
How is a limited partnership formed
- required to file a partnership agreement or any other required documentation with the domicile state
- Partnership agreement will specify which partners are limited partners and which are general partners
How is a limited partnership disolved
- same as a general partnership
- limited liability feature might attracted more buyers
- the transfer of a limited partnership share might be very difficult
How is the capital portion of the limited partnership treated
- easier to raise capital in a limited partnership than in a general partnership because to of the availability of the liability shield for the non managing limited partners
How is capital in a limited partnership treated
- easier to raise in a limited partnership than in a general partnership because of the liability shield
- the limited liability may affect the partnerships ability to obtain outside financing
How is liability treated for a limited partnership
- limited as long as they refrain from participating in the management of the enterprise
- general partners in a limited partnership have unlimited liability
How is the management/operation of a limited partnership treated
- somewhat of a hybrid entity
- general partners run the business
Are limited partners subject to self employment tax
- no since they are passive investors
What are the advantages of limited partnerships
- Favorable passthrough partnership taxation status
- flexibility in structuring ownership interests
- limited partners are not personally liable for debts and obligations
What are the disadvantages of limited partnerships
- must file with the state to register
- general partners are liable for debts and other obligations of the limited partnership
- losses for limited partners are generally passive losses
What is a limited liability partnership
- a hybrid entity that provides partial liability protection to its members
- generally used by accountants, attorneys, and doctors
- partners have liability protection from the other partners acts