TAXATION OF BUSINESS ENTITIES
QUESTIONS AND ANSWERS
s Sole Proprietorship - -Generally one person
-DBA: An Assumed Name
-Taxed once at the rate of the original owner
-No legal difference btwn the entity and the person
Limited Liability Corporations - -Not incurred to the debts of others
-Debt is set apart from the debts of the owner
-Price for every $ the corp. earns it will be taxed twice.
Corporation Attributes - -Operate under state law as an entity separate from its owners, directors and
officers
-Limited liability for Owners (Shareholders)
-Centralized Management- Directors appoint officer to run corporate act
-Free Transferability of ownership rights
-Continuity of life: not affected by the death, insanity bankruptcy or withdrawal of an owner
-Capacity for multiple (unlimited) owners
"Check the Box" Regulations - Automatic classification of certain entities as corporations- per se
treatment
Recognition of the Corporate Entity - -Moline Products: Corporation was a seperate entity and not an
agent of the shareholder. Taxation at a corporate level.
-Bollinger: Corp. was not a separate entity but merely an agent of the shareholders. Taxation at the
shareholder level.
Income Taxation of the Corporation - Code 11: graduated tax rate structure: no lower level brackets for
personal service companies.
Code 267: limitation on Trans.
Code 448(a): accounting method
Code 1561: Multiple Corp.
Favorable Tax Attributes - -Progressive Tax Rate Structure: (begins at 15%) Low alt min tax (20%)
,-Owners may be employees of the Corp. Split income btwn corp and owner
-Freedom to elect fiscal year
-Dividend income subject to beneficial rules
-Stock Capital Asset
-Special rule allow ordinary loss treatment on certain stock
-Stock based compensation
Unfavorable Tax Attributes - -Double Taxation of Corp. Income
-No special treatment for corp. cap gains
-No Capacity for deduct cap. losses except against gains
-Restriction on Accounting Method
-Assets can not generally be removed from the corp w/o adverse tax conseq
-Penalty taxes apply in certain circumstances
"Cradle to Grave" Approach - Significant Interim Distributions
-Redemption & Partial Liquidations
-Stock Dividends
-306 Stock
Terminating Stock ownership int.
Corporate tax-free reorganizations
Taxable complete or partial liquidation
"C" Corporation - -Come from sub-chapter C of the Internal Revenue Code
-Independent legal entity but have its whole separate set of rules with taxes
-Files a form 1120
"S Corporation" - -Flow Through Entity
-First have to form a C corp.
-An Election at the federal level to have there corp taxed as an S corp.
-Changes it to a Flow through entity
-Legally independent identity apart from its shareholders
-Files its own tax returns 1120S
, -Benefit of being a corporation but because its flow through the $ of profit is reported but it does not
pay any tax
-Distributed Pro-Rata to the shareholders
-Limitation on the # of shareholders
-Limited to types of Shareholders
Partnerships - -Flow Through Entity
-$ will go out to the partners depending on their agreed distribution scheme
-$ not taxed at the entity level
-Partnership has to file a tax return but a partner doesn't have any limitation of liability
-All the partners have liability for the actions of the other partners
-Schedule C to the 1040
Limited Liability Companies - -Note: LLC owners can elect for the IRS to tax the LLC as a sole
proprietorship, partnership & Corporation, or S corp. Owners make this election through the IRS after
the co forms with the state
-LLC is a creation of state law
-Dont exist for federal tax purposes
Limited Liability Partnerships - -Can elect to be a partnership if only one
-2+ just by forming the LLC became a partnership
Considerations in Choosing Form - -Who owns (or will own) the business?
-What is the Nature of each owner's interest
-Who Manages (or will) the Business?
-How (and When)will the money flow
-What happens on Apr. 15
Forming A Corporation - -Form a Corp. and Pay Tax
-Internal rev. code a way to do it and not pay taxes
Code Sec. 351 - General Rule: No gain or loss shall be recognized if property is transferred to a
corporation by one or more persons solely in exchange for stock in such corporations and immediately
after the exchange such person or persons are in control of the corp.
Transfers of Property to a Corporation - -Have to take back stock, put in property, and those people have
to be in control of the corp at the end of the transaction
QUESTIONS AND ANSWERS
s Sole Proprietorship - -Generally one person
-DBA: An Assumed Name
-Taxed once at the rate of the original owner
-No legal difference btwn the entity and the person
Limited Liability Corporations - -Not incurred to the debts of others
-Debt is set apart from the debts of the owner
-Price for every $ the corp. earns it will be taxed twice.
Corporation Attributes - -Operate under state law as an entity separate from its owners, directors and
officers
-Limited liability for Owners (Shareholders)
-Centralized Management- Directors appoint officer to run corporate act
-Free Transferability of ownership rights
-Continuity of life: not affected by the death, insanity bankruptcy or withdrawal of an owner
-Capacity for multiple (unlimited) owners
"Check the Box" Regulations - Automatic classification of certain entities as corporations- per se
treatment
Recognition of the Corporate Entity - -Moline Products: Corporation was a seperate entity and not an
agent of the shareholder. Taxation at a corporate level.
-Bollinger: Corp. was not a separate entity but merely an agent of the shareholders. Taxation at the
shareholder level.
Income Taxation of the Corporation - Code 11: graduated tax rate structure: no lower level brackets for
personal service companies.
Code 267: limitation on Trans.
Code 448(a): accounting method
Code 1561: Multiple Corp.
Favorable Tax Attributes - -Progressive Tax Rate Structure: (begins at 15%) Low alt min tax (20%)
,-Owners may be employees of the Corp. Split income btwn corp and owner
-Freedom to elect fiscal year
-Dividend income subject to beneficial rules
-Stock Capital Asset
-Special rule allow ordinary loss treatment on certain stock
-Stock based compensation
Unfavorable Tax Attributes - -Double Taxation of Corp. Income
-No special treatment for corp. cap gains
-No Capacity for deduct cap. losses except against gains
-Restriction on Accounting Method
-Assets can not generally be removed from the corp w/o adverse tax conseq
-Penalty taxes apply in certain circumstances
"Cradle to Grave" Approach - Significant Interim Distributions
-Redemption & Partial Liquidations
-Stock Dividends
-306 Stock
Terminating Stock ownership int.
Corporate tax-free reorganizations
Taxable complete or partial liquidation
"C" Corporation - -Come from sub-chapter C of the Internal Revenue Code
-Independent legal entity but have its whole separate set of rules with taxes
-Files a form 1120
"S Corporation" - -Flow Through Entity
-First have to form a C corp.
-An Election at the federal level to have there corp taxed as an S corp.
-Changes it to a Flow through entity
-Legally independent identity apart from its shareholders
-Files its own tax returns 1120S
, -Benefit of being a corporation but because its flow through the $ of profit is reported but it does not
pay any tax
-Distributed Pro-Rata to the shareholders
-Limitation on the # of shareholders
-Limited to types of Shareholders
Partnerships - -Flow Through Entity
-$ will go out to the partners depending on their agreed distribution scheme
-$ not taxed at the entity level
-Partnership has to file a tax return but a partner doesn't have any limitation of liability
-All the partners have liability for the actions of the other partners
-Schedule C to the 1040
Limited Liability Companies - -Note: LLC owners can elect for the IRS to tax the LLC as a sole
proprietorship, partnership & Corporation, or S corp. Owners make this election through the IRS after
the co forms with the state
-LLC is a creation of state law
-Dont exist for federal tax purposes
Limited Liability Partnerships - -Can elect to be a partnership if only one
-2+ just by forming the LLC became a partnership
Considerations in Choosing Form - -Who owns (or will own) the business?
-What is the Nature of each owner's interest
-Who Manages (or will) the Business?
-How (and When)will the money flow
-What happens on Apr. 15
Forming A Corporation - -Form a Corp. and Pay Tax
-Internal rev. code a way to do it and not pay taxes
Code Sec. 351 - General Rule: No gain or loss shall be recognized if property is transferred to a
corporation by one or more persons solely in exchange for stock in such corporations and immediately
after the exchange such person or persons are in control of the corp.
Transfers of Property to a Corporation - -Have to take back stock, put in property, and those people have
to be in control of the corp at the end of the transaction
