Other Business Structures & Considerations Flashcards
What are members’ rights in a limited liability corporation (LLC)?
The same rights as partners in a general partnership – they can manage the company barring any contrary agreement
Essentially, they have the rights of general partners with the liabilities of limited partners
How many members are needed to form a LLC?
Only one, and there is no limit on the number of owners (unlike an S corporation)
Who is the manager for a LLC?
An elected officer, effectively the president of the company
LLCs do not need to have a manager, and a manager does not need to be a member
What must be filed for a LLC?
Articles of organization – very similar to articles of incorporation
What do LLC members typically enter into?
An operating agreement – a contract among the members explaining how the business will be run and what rights members will have if a member dissociates
How are LLCs dissolved?
The rule used to be that LLCs were dissolved in the same way as general partnerships
Now, even without any members, an LLC can continue if other persons with an interest in the LLC elect members to continue the business
If a LLC dissolves, in what order are claims paid out?
(1) to creditors
(2) to members for their capital contributions
(3) to members for their undistributed profits
What is a sole proprietorship?
A business run by one person (the owner) which is not legally distinct from him
Thus, the owner’s interest cannot be transferred without dissolving the business, and it cannot be partially transferred at all
What are the benefits in starting a sole proprietorship?
It is much less costly to form, having no requirements outside of those generally governing businesses (e.g. hiring practices)
SPs do not need to register to do business in other states, either
What are some general characteristics of a sole proprietorship?
- managed by one person without needing another’s consent
- lasts as long as the owner wishes, up until his death
- owner has unlimited liability
How might a sole proprietorship have a more difficult time with obtaining financing?
Lenders will want to consider both business and personal debts, which can make application processes more difficult
This usually causes sole proprietorships to be small
How is a sole proprietorship taxed?
It does not have any separate tax implications – it is mixed with the owner’s income tax return
A one-member LLC is taxed the same way
How are partnerships and limited liability companies taxed?
They are mere “conduit” entities – income and loss (as well as distributed gains and losses) are passed on to the individual partners
Distributed gains and losses are taxed even if the distributions are not actually paid out
What is the general rule for taxing entities with two or more people?
An entity with two or more people – if it is NOT a corporation – will ordinarily be taxed as a partnership
Is the default status for a corporation C or S?
A corporation, by default (i.e. without electing otherwise), is a C corporation
If the corporation distributes property to shareholders, whether in liquidation or dividends, what are the taxable implications?
Dividends are treated as taxable income to shareholders
The corporation can record a gain or loss when distributing property (e.g. if its FMV is different from when it was first acquired)
What are the tax implications for stock dividends?
Because stock dividends cause the value of each stock to decrease proportionately, there is no transferred value to be taxed – thus stock dividends are not taxed as income for the shareholders, nor does the corporation report any gain or loss
Under what circumstances might salaries be treated as effective dividends?
If an employee for a corporation is also a shareholder, then one way to avoid double taxation is to increase that employee’s pay as a de facto dividend
Thus, if the IRS determines a salary to be unreasonably high, they can treat it as non-deductible or as a “constructive dividend”
How does an S corporation differ from a C corporation?
S corporations avoid double taxation by limiting taxation to the shareholder level
What are the requirements for electing S corporation status?
(1) 100 shareholders max (family members count as one, voting trusts do not)
(2) only one class of stock (different voting rights are not different classes)
(3) shareholders cannot be nonresident aliens, corporations, or foreign trusts
(4) consent of all shareholders, including shareholders from past taxable year
What corporations are disqualified from electing S corporation status?
(a) some financial institutions
(b) insurance companies
(c) corporations with 80% subs
(d) members of affiliated groups
(e) companies with a possessions tax credit
(f) domestic international sales corporations (DISCs)
Can S corporations have subsidiaries which are also S corporations?
Yes, and these are called Q subs
