...various business formations, some of the most notable are the S corporation, C Corporations and the LLC. While these are all different forms of businesses they do share some similarities. These similarities make it somewhat difficult to determine which kind of business that you need to form. The ultimate decision making comes from the structural differences, and operating advantages and disadvantages. An S Corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level. To qualify for S corporation status, the corporation must meet certain qualifications. It must be a domestic corporation, have only allowable shareholders (including individuals, certain trusts, and estates and may not include partnerships, corporations or non-resident alien shareholders), have no more than 100 shareholders, have only one class of stock and not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations). To dissolve an S Corporation there are a few steps. You must first obtain a vote from the...
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...considered when choosing a business entity: liability, taxation and record-keeping (Entrepreneur.com). Liability Bill and Darlene need to determine to what extent they need to be insulated from legal liability. This can depend on the kind of business they’re planning to start. A business that has a large amount of fixed assets that require hefty investments may mean the potential first year losses will be higher than expected so it would be better to limit their personal liability for the business losses. A Limited Liability Partnership (LLP), a Limited Liability Company (LLC), or a corporation can allow them to insulate their assets in the case they are found legally liable for damages. An LLC allows any entity to be owners but they offer more flexibility than a corporation. This is important if Bill and Darlene decide to grow their business and add more members since there are no limits for an LLC yet they still retain the tax advantages of a partnership with pass-through...
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...Legal Forms of Business Mike Robertson LAW531 May 7, 2012 Julie Benes Legal Forms of Business The well-informed businessperson understands choosing the correct business form is important. The type of business form determines what type of business organized, how money flows in and out of the business, how the business and owners are taxed, and the levels of risk to owners. There are several types of business forms. These types are sole proprietorship, partnership, Limited Liability Partnership (LLP), Limited Liability Company (LLC), S Corporation, franchise, and corporation. The businessperson needs to have an understanding of which business form is justified for their business startup. The beginning businessperson looks at the sole proprietorship a majority of times because of its simplicity (Anthony, 2011). A sole proprietorship is the simplest form of business organization. The owner of the business, the sole proprietor, is the business. There is no separate legal entity. Sole proprietorships are the most common form of business organization in the United States (Cheeseman, 2010). One example of a business that becomes a sole proprietorship is an independent contractor. The future business owner completes work for a business, but they are not an employee of these companies, they are considered self-employed and therefore a sole proprietor. Most person call this “moonlighting.” For example, if an electrical contractor with a full-time job also does home electrical...
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...Being a desiring business owner, critical examination must be placed into the various business structures when opening your business. Each business requires the correct planning and structure in the business agreement. Without an agreement delineating the relationships between the members, managers, partners and shareholders, the court applies default provisions. There is a significant possibility that the default provisions dictating the law will not align with the needs of the organizers. The most common methods of business operations are as sole proprietorships, partnerships, limited liability companies and corporations. As such, after careful review and revision of the different business organizations, I have decided that I would establish a Limited Liability Company (LLC). A Limited Liability Company, quite simply is a company whose liability is limited. That’s the short version. The longer version is that a limited company is a type of company which when set-up allows an entrepreneur to keep their own assets and finances separate from the business itself. This means that people who have invested in the business (the shareholders) are only responsible for any company debts up-to the amount that they have invested and no more. It is therefore a good way for a business to get investment and run without risk to a personal wealth. Essentially a Limited Company is seen as an entity in its own right, which can be subject to legal action. As a separate body, a...
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... This system applies to the business S-corporation-called the "C-corporation" (C-corp) for reasons we'll see shortly-and the system of taxing first the corporation and then its owners is called the "corporate double tax." "Pass through" taxation. The entity (called a "flow-through" entity) is not taxed but its owners are each taxed (more or less) on their proportionate shares of the entity's income. The leading forms of pass through entity (further explained below) are: Partnerships, of various types. "S-corporations" (S-corps), as distinguished from C-corps. Limited liability companies (LLCs). A sole proprietorship such as John Doe Plumbing or Marcus Welby, M.D. is also considered a pass through entity even though no "organization" may be involved. The first major consideration (in this case, a tax consideration) in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass through entity that has only one level (directly on the owners). Losses are directly deductible by pass through owners while C-corp losses are deducted only against profits (past or future) and don't pass through to owners. The major business consideration (as opposed to tax consideration) in choosing the form of business is limitation of liability, that is, to protect your assets from the claims of business creditors. State law grants limitation of liability to corporations (C and S-corps), LLCs, and partners in certain forms of partnership...
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...S Corporation vs. C Corporation: AComparison Category: Incorporating Your Business When starting a business or changing your business structure, one of the most common options small business owners evaluate is whether to form an S corporation (S corp) or C corporation (C corp). These are the two most common ways to incorporate online, and the choice really depends on your business goals. S corporation vs. C corporation: The similarities The C corporation is the standard corporation, while the S corporation has elected a special tax status with the IRS. It gets its name because it is defined in Subchapter S of the Internal Revenue Code. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met. But C corporations and S corporations share many qualities: * Limited liability protection. Both offer limited liability protection, so shareholders (owners) are typically not personally responsible for business debts and liabilities. * Separate entities. Both the S corp and C corp are separate legal entities created by a state filing. * Filing documents. Formation documents must be filed with the state. These documents, typically called the Articles of Incorporation or Certificate of Incorporation, are the same for both C and S corporations. * Structure. Both have shareholders, directors and officers. Shareholders are the owners of the company and elect the board of directors, who in turn...
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...Limited Liability Corporation and Partnership Paper University of Phoenix FIN/419 November 26, 2012 Every business has a basic idea of the entity in which to establish. Capitalization and protection is the main focus to establish the business with a question of which type of entity should a business use to move forward. Businesses have a host of factors when making this decision, the most common forms of these entities are, partnership, corporation, sole proprietorship, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by the different state statutes. The following will list two of these entities and the business entity which I would choose. Limited Liability Corporation Limited Liability Corporation has a unique quality of being structured like a regular corporation, and having the attributes of a partnership. In a Limited liability corporation the owners are protected from personal liabilities, which are similar to a corporation, but have the tax advantages of the partnership. This means the creditors of the business may not pursue any of the personal assets of members of the LLC to recover any business debts. Also if a member of the LLC has any personal debt, the creditors may not attempt to recover from the corporation. LLC owners, called "members," can manage their businesses or hire professional managers. In addition, LLCs enjoy a lot of flexibility. For instance, they can have as many members...
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...Limited Liability Corporation and Partnership Jacob Sanchez FIN-419 December 22, 2014 Michele Huss Limited Liability Corporation and Partnership Introduction Many people attempt to start businesses annually and need a little guidance on what their best choices are for forming the blueprint of their future endeavors. Limited Liability Corporations and Partnerships are a couple choices that can be chosen by some entrepreneurs. They have some things in common, and also have distinct differences. This paper will discuss how each type of business entity is formed, the tax benefits, some advantages and disadvantages. Lastly, these things will be evaluated to determine under what circumstances one should be chosen over the other. Limited Liability Corporation A Limited Liability Corporation, from now on an LLC, is a less complex formation of a corporation. It is formed by filling an articles of organization with the states Secretary of State office. This article will include the business name, the members, and in some states an operating agreement. (U.S. Small Business Administration, n.d.) In an LLC with more than one member an operating agreement is ideal, for structure and regulation. In most instances it will provide a roadmap of rights, arrangements, and profit sharing and loss. (U.S. Small Business Administration, n.d.) Taxation is an important aspect of forming a business, an LLC has many choices for taxation. An LLC can opt to file as a corporation, in which case...
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...Limited Liability Company (LLC) vs. Sub-Chapter S Corporation (S Corp) What is the difference between an LLC and an S Corp? When choosing to incorporate, the most common decision smaller businesses face is which type of corporation to form. Here is a comparison between LLCs and S-Corporations. LLC formation came into its own at the end of 1996 when the “check-the-box” taxation regulations were passed and LLCs were allowed to enjoy, among other things limited liability, flexibility of management, and the option to elect pass-through taxation. A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. When forming an LLC there are some general principles one must adhere to per State. First when choosing a name for your LLC you need to follow three rules. One it must be different from an existing LLC in your state. Two it must indicate that it's an LLC (such as "LLC" or Limited Company"). And three it must not include words restricted by your state...
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...purposes of federal tax income? The $300,000 you earned is considered earned income; therefore, it should be reported as gross income on either a Schedule C of your individual income tax return or if you have reported your company as being a LLC, you can file a LLC return. b. How is the $25,000 treated for purposes of federal tax income? The $25,000 would not be reported as income. The reasons why are that the $25,000 should have been classified as an expense (client advance) on the balance sheet at the time your received it two years ago. It would not have been reported as a deductible expense following the matching principle. In the current year when the $25,000 is reimbursed, the revenue minus the expense equal to zero. However, if you expensed it in the year it was paid, the $25,000 would be reported as income on this year’s income tax. c. Determination regarding reducing the taxable amount of income for both (a) and (b) above? You can make use of an LLC reporting as an S Corporation where wages that are paid to the shareholder may be less than the $300,000. The regular income tax rates will apply regardless, but this legal ploy can save some social security taxes which amount to an additional 15.3% (S-Corporations vs. LLC: Income Tax Savings Benefits, 2012). You can reduce the taxable amount of income by fully funding a variety of retirement plans, such as IRAs, SEP-IRAs, profit sharing. Take advantage of Section 179 (IRS, 2012), you can pay as many current...
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...Part A (the report) SOLE PROPRIETORSHIP: This business entity is the most common business used in the United States. This entity is owned and ran by one individual where there is no legal distinction between the owner and the business. This legal name of the business is the owner’s name; however, the business may operate under a fictitious name by filing a DBA. This person is legally accountable for all elements of the business including finances, loans and debts. One of the advantages of doing business as a Sole Proprietorship is that it’s easy to create. Another key advantage is the autonomy. Since the owner or individual is the business, he or she may decide for themselves whatever business decision they feel is needed to make, including the business finances. Some disadvantages would be that it is impossible to bring in others to do business being there can only be one owner. This also makes it difficult to raise capital in terms of seeking investors. Tax planning can also be challenging for the sole proprietor. Since there is no legal distinction between the owner and the business, all the income generated by the business is treated as ordinary personal income to the owner. • Liability: Sole Proprietors have unlimited liability. There is no difference between the owner and the business. Therefore, the owner is personally liable and responsible for all the business obligations and debt. Doing so makes all of the owner’s personal assets reachable to creditors. • Income...
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...Formation: Choosing the Form that Fits Review Questions 1. Describe the basic features that distinguish the four basic forms of business ownership: sole proprietorships, general partnerships, C corporations, and limited liability companies. 2. Why do many entrepreneurs initially set up their businesses as sole proprietorships? Why do many successful entrepreneurs eventually decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC? 3. How do limited partnerships and limited liability partnerships differ from general partnerships and from each other? 4. What advantages help explain why virtually all large companies are organized as C corporations? 5. What steps are involved in forming a C corporation? 6. Describe the relationship between a corporation’s common stockholders, its board of directors, and its chief executive officer (CEO). 7. How does a merger differ from an acquisition? What is the difference between a horizontal merger or acquisition and a vertical merger or acquisition? Give a real world example of recent merger to illustrate each type of combination. 8. Compare an S corporation with a limited liability company. Why do you think limited liability companies are currently more popular than S corporations? 9. What are the main advantages and disadvantages of a business format franchise arrangements for the franchisee? For the franchisor? 10. What is a Franchise Disclosure Document (FDD) and why...
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...Legal Forms of Business There are many forms of businesses, from the small business to the corporate business that are found all over the world. Each has its own unique properties, as well as some areas that are similar to all. In this paper, I will give scenarios of the following legal forms of business: sole proprietorship, limited liability partnership, Limited Liability Company, S corporation, franchise and corporate form. This paper will also discuss the justification as to why this business form is preferred. Sole Proprietorship. Suzie owns a shop that does body wraps that helps individuals have slimmer waists and thighs. People are wrapped like mummies and the elastic wraps are saturated in a mineral solution to help assist in breaking down fat. She owns a small shop in a strip mall downtown. A Sole Proprietorship is a business that is owned by one person, and is commonly known as a small business. It is preferred by individuals who want to start their own business because they can make all the decisions regarding payroll, hiring and firing of employees ("Doing Business as a Sole Proprietor,") Business owners of this type file their own taxes. The owner can also sell the business without the approval from others, since they own the business outright. Personal liability is also a factor when opening a business as a sole proprietor. If for example, a customer gets burned by the wraps that are used and the customer sues Suzie, she will have to hire her own attorney...
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...Partnerships vs. Corporations Tracy Kamke Professor Edward Hastings ACC317 March 9, 2014 A partnership is an association owned by two or more people to carry a business or trade with each parnter contributing money, property, labor, or skill and all partners expecting to share the profits and losses. A corporation is a separate entity that has its own rights, privileges, and liabilities separate from its members. Whether you choose to be a partnership or corporation, depends on how much your federal income tax will be. There are different types of corporations and many different partnership types. There are two different types of corporations. You have the C Corporation, which has the toughest tax bracket; you are subject to double taxation. The first tax is on the company's net earnings, and the second tax is that each shareholder must pay tax on his or her dividend. A C Corporation can reduce or eliminate its federal income tax liability by distributing its income to the shareholders who perform services for the company (Battersby, 2008, p.10). The other is the S Corporation which resembles the partnership and report entities like partnerships. Partnerships are not taxable entities and are not subjected to federal income tax. In a partnership, you are required to file a Form 1065 to report the results of the partnership's business activities. There is a general partnership which is two or more partners that participate in management of...
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...RANULFO ALEJADO ACC/537 Financial Accounting Basic Accounting Concepts and Business Structures Executive Summary Most businesses nowadays either sole proprietorship, partnership or corporation should prepare financial statements in accordance with the Generally Accepted Accounting Principles (GAAP). Financial statements are the major source of financial information that would help management, creditors, and investors in their decision making. Financial reporting is one of the responsibilities of the company in communicating financial information, which guides in investment and credit decisions, assessing cash flow prospects, and about company’s resources, and claims to its resources. Accrual and cash basis of accounting are the methods employed in recording financial transactions, which affect the credibility of its financial information. Generally Accepted Accounting Principles Generally Accepted Accounting Principle (GAAP) is a helpful guide in financial reporting. For the past half a century, less than 50% of the GAAP issued are still effective today. These were reviewed and revised in accordance to the investors, and creditors information needs (Fisher, 1998). GAAP are set of standards and procedures that have substantial authoritative support. The organizations responsible in its development are the Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB) and Government...
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