Unit 9 Flashcards
What is the simplest business form
Sole proprietorship - no paperwork to start or dissolve
How does sole proprietorship report tax
Schedule C with Form 1040, it’s the business income statement.
What part of self employment tax do sole props. pay?
Sole proprietors pay self-employment tax, covering both employer’s and employee’s shares of Social Security and Medicare tax.
What is the default business type for someone starting a business w/o choosing an entity?
Sole prop.
What is a major disadvantage of sole proprietorship?
Unlimited liability for the owner. Personal and business assets at risk for owner’s or family’s wrongdoing.
How would you lower your liability as a sole proprietor?
Liability can be lessened with business liability insurance and personal liability protection.
A partnership is formed when?
Formed when two or more individuals do business together without choosing a formal business structure.
Qualifying non-recourse financing means
Qualifying non-recourse financing means debt issued by a bank, pension fund, or governmental agency.
Partnership special allocations
the partners can agree to split items of revenue and expense something other than pro rata ownership percentages.
What can a partner include in their basis?
Partnership debt can be included in partners basis, including recourse or qualifying non-recourse financing.
Special allocations allowed in partnership accounting, as long as
as long as substantial economic effect is maintained.
Partner’s basis benefits from partnership debt in what structure?
Partner’s basis benefits from partnership debt only in a partnership, not in an S-corporation.
Special Economic Effect in partnership
each partner’s capital account and tax basis must reflect these special allocations
How do partnerships compensate partners?
through guaranteed payments, not salaries
Partners pay self employment taxes on what income?
Guaranteed payments, not salary
General Partnership
- Involves two or more partners.
- All partners have unlimited liability for the business.
- Each partner is personally liable for the actions of the other partners.
General Partnership partner liability
Each partner is personally liable for the actions of the other partners.
Partnerships file what form
All partnerships file IRS Form 1065
Individual partners receive what form?
K1 - detailing revenue and expense items for personal Form 1040 reporting
An LLC can choose to be taxed how?
sole proprietor (if single-member), partnership, or corporation.
What taxation method would an LLC typically choose due to favorable accounting features?
Partnership has favorable accounting features
LLC offers liability protection similar to what
similar to corporations
Are all laws the same regarding LLC taxation and liability protection?
No state laws vary
LLCs taxed as partnerships
Face similar tax issues as partnerships, including special allocations with substantial economic effect.
General partners in an LLC taxed as partnerships incur what
General partners Incur guaranteed payments AND self-employment taxes
How does recourse and nonrecourse debt work with an llc taxed as a partnership
Partners Benefit from recourse and qualifying non-recourse debt, enhancing basis in the entity for partners.
LLCs taxed as partnership use what forms
File IRS Form 1065, with individual members receiving Form K-1 detailing revenue and expense items for personal Form 1040 reporting.
C corps file what form
IRS Form 1120
C corp officers, shareholders and directors have liability limited to their what
limited to their investment in the corp
Dividend deduction for C corps
dividend deduction for dividends from investments in other corporations.
C corp Dividend taxation varies based on ownership stake
-Less than 20% ownership: 50% of dividends not taxed.
-20%-80% ownership: 65% of dividends not taxed.
-80% or more ownership: 100% of dividends not taxed, treating the investee as a wholly-owned subsidiary.
What is the biggest drawback of a C corp?
Double taxation: Dividends taxed at entity and individual levels, but recent rate reductions lessen this.
What is the most expensive business form?
C Corp is the most expensive business form, requiring extensive legal documentation.