Chapter 15: Entities Overview
Corporation
- Business Entity recognized as separate entity from its owners under state law - Formally organize with the state by Articles of incorporation - entity is responsible for liabilities - suitable for initial public offering (only one)
Current marginal tax rate
- Lowest - 15 percent and highest - 39 percent - Most profitable corporations - 35 percent
Sole proprietorship
- a business entity that is not legally separate from the individual owner of the business - The income of a sole proprietorship is taxed and paid directly by the owner - Does not have to formally organize with the state unless it is a single-member LLC
Dividends received deduction (DRD)
- a corporate deduction for part or all of a dividend received from other taxable, domestic corporations - reason is to mitigate the tax burden associated with more than two levels of tax on corporate income -70,80,100 depending on ownership
S corporation
- a corporation under state law that has elected to be taxed under the rules provided in subchapter S of the Internal Revenue Code. -flow-through entity - uses Form 1120S
Limited partnership
- a partnership with at least one general partner with unlimited liability for the entity's debts and at least one limited partner with liability limited to the limited partner's investment in the partnership - files Certificate of limited partnership to the state
Limited liability company (LLC)
- a type of flow-through entity for federal income tax purposes - LLC have limited liability with respect to the entity's debts or liabilities - taxed as partnerships for federal income tax purposes. - files Articles of organization
After-tax earning distributions (Corporations)
- dividends received are subject to corp. ordinary tax rate - can be at a 3rd level taxation if companies are receiving the dividends distribute it to its shareholders (DRD)
Sole Proprietorship tax classification
- flow-through entity - income reported on form 1040, schedule C
Partnership tax classification
- flow-through entity - income reported on form 1065
After-tax earning distributions (INDIVIDUALS)
- individual shareholders receiving distributions from c-corps pay the second tax on the dividends - usually at 15% but at a 0/15/20 preferential rate but can be charged addition 3.8% if they are high-income taxpayers
Flow-through entities
- legal entities like partnerships, limited liability companies, and S corporations that do not pay income taxes - Income and losses from flow-through entities are allocated to their owners.
Ways to reduce the corporate level tax and why
- shifts income away from high tax rate to low and it shields income form the corporate level tax - shift income by paying salaries, fringe benefits, leasing property or paying interest on loans from shareholders
unincorporated entities
- taxed as partnerships if they have more than one owner - taxed as sole proprietorships if held by a single individual - Can elect the C-corp then S- corp election if it makes more sense from a tax perspective
Net operating loss (NOL)
- the excess of allowable deductions over gross income - Carry back 2 years carry forward 20 years - not available to offset shareholders personal income
Double Taxation
- the tax burden when an entity's income is subject to two levels of tax. - Income of C corporations is subject to double taxation. - The first level of tax is at the corporate level and the second level of tax on corporate income occurs at the shareholder level. - Income of flow-through entities is generally not subject to double taxation.
C corporation
-a corporate taxpaying entity with income subject to taxation - Separate taxpaying entity - Called a "C" corporation because the corporation and its shareholders are subject to the provisions of subchapter C of the Internal Revenue Code - uses form 1120
General partnership
-a partnership with partners who all have unlimited liability with respect to the liabilities of the entity - does not have to formally organize with the state - Partnership agreement
Strategies to reduce the shareholder level tax
-retained earnings - hold stock before sellling
Certificate of limited partnership
a document limited partnerships must file with the state to be formerly recognized by the state. The document is similar to articles of incorporation or articles or organization.
Articles of incorporation
a document, filed by a corporation's founders with the state describing the purpose, place of business, and other details of the corporation.
Articles of organization
a document, filed by a limited liability company's founders with the state, describing the purpose, place of business, and other details of the company.
Partnership agreement
an agreement among the partners in a partnership stipulating the partners' rights and responsibilities in the partnership.
