Taxation of business entities chapter 15

How do we determine whether a particular business entity is treated as a separate taxpaying entity or as a flow-through entity for tax purposes?

C corporation (separate taxpaying entity; income reported on Form 1120 ) S corporation (flow-through entity; income reported on Form 1120S) Partnership (flow-through entity; income reported on Form 1065) Sole proprietorship (flow-through entity; income reported on Form 1040, Schedule C

Legal Classifications

Corporation Limited Liability Company General Partnership Limited partnership Sole Proprietorship

Key Facts

Corporations are C corporations unless they make a valid S election. Unincorporated entities are taxed as partnerships if they have more than one owner. Unincorporated entities are taxed as sole proprietorships if held by a single individual or as disregarded entities if held by a single entity. Unincorporated entities may elect to be treated as C corporations. They then could make an S election if eligible.

Responsibilty for liability

Corporations-are total solely responsible for its liabilities. LLC- are responsible for the liabilities Limited partners - are NOT responsible to the liabilities of the business. but are not allowed to participate in the business of the company. Sole Proprietors are responsible but can file a single owner LLC to protect them...

Partnerships

May be organized between two or more people by written agreement called an partnership agreement. or informally these are still considered to be legal entities. Must file a certificate of limited partnership.

separate taxpaying entities or as flow-through entities

Separate taxpaying entities pay tax on their own income. In contrast, flow-through entities generally don't pay taxes because income from these entities flows through to their business owners who are responsible for paying tax on the income.