...business). 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...
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...After a thorough amount of research, I find it best to simply to look at the root of the concerns. Here we have two gentlemen, from widely different backgrounds seeking to make a profit, albeit, in varying degrees in the market of laundry and dry cleaning. It is to my understanding that Mr. John Smith will be the source of capital in this joint business venture. Mr. Smith, a retired man, is concerned with protection from liability for the sake of his personal assets and belongings. Taxes are not a concern as long as they are paid and protection keeps him behind some form of veil. On the other end of the spectrum, we have the younger Mr. Juan Gonzalez. Mr. Gonzalez does not have much in the way of investments nor does he have any personal assets that would be much at risk. Mr. Gonzalez is more concerned about taxes and with obtaining as much profit as possible with no minimal attention to risk, understandably so. It’s best to take these drastic views and ideologies and reach some semblance of a compromise between both parties in terms of which business entity should be agreed upon. To commence, it would be best to eliminate superfluous options from the get go. Sole proprietorship is out of the question simply because of its inherent definition. A “partnership” will also not be considered, because although it offers several tax breaks and the potential to be more easily managed, it has an unlimited amount of liability risk. If for any reason there were ever a dispute and...
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...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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...Congratulations on your newest venture. We know you have a lot of options when choosing a consultant and are thrilled we will be able to assist you. We understand you are contemplating the entity of choice for your company. After immense research we have come to the conclusion the best option for Oliveology is to be an S Corporation. There are many benefits of this entity status. One of the largest benefits is no double taxation. The shareholders are only taxed at the shareholder level. Also, unlike a partnership, where all the partners are subject to self-employment tax on income from the firm, only wages earned are subject to a self-employment tax in an S corporation. In an S corporation shareholders may be employees, and the wages paid are deductible from the net income but are also subject to payroll taxes and therefore you may be inclined to pay lower wages to avoid this tax. Keep in mind though, that if you understate your wages from normal industry salaries the IRS may require you to pay higher salaries relative to the industry and position. Nevertheless, if prepared properly, this rule should only be beneficial. Another large benefit of the S Corporation status is that it stands alone separate from its shareholders. If any of you decide to leave the company for any reason, then the company can continue to run its daily business without much interruption. The shareholders receive their pro rate share of profits and pay tax based on their personal income tax rates, although...
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...purchase a manufacturing company, Smithon Widgets (a C corporation), that has been very profitable. Mr. Jones is the majority shareholder of another C corporation. Johnson Services that has incurred significant losses. 1. Outright purchase of Smithon stock a. 1. Issue: Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company – would that raise debt to equity issues? 2. Conclusion: Mr. Jones, you should not purchase the stock of Smithon outright. If this is done, then you would inherit all assets and liabilities of Smithon. This would increase your personal tax liability. Issuing debt in Johnson Services Company to pay for the Smith Company would not be a good idea considering, Johnson services has incurred significant losses already. This would definitely raise debt to equity issues, since Johnson Company is operating with an existing loss and using debt equity to acquire additional assets. This would also produce a higher debt to equity ratio, meaning that most of Johnson Services’ assets are financed by debt. This may deter future investors. b. 1. Issue: Should Mr. Jones convert Smithon to an S corporation and change the fiscal year end to a calendar year end? 2. Applicable Law & Analysis: Would a convert of entity be beneficial to your tax situation? An S corporation is not subject to the corporate tax, except for a tax...
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...company was founded in 1983 by Stephen Lizio, a man with prior experience in the wine and food industry. When the firm first started operations, it only provided wait staff and other services to catering companies. However, in the mid-1980s the company began renting tables, chairs, and equipment as well and eventually became a full service company. Al Lovata, a former banker who started out as a part time financial consultant for Be Our Guest Inc. in 1987, was eventually promoted to Chief Executive Officer. Simone Williamson was also brought into the company in 1989 because of her extensive network among the Boston area caterers, and by 1996 she was appointed President of the firm. The company was growing rapidly from the early to late 1990’s, producing revenues of about $1 million in 1991 and reaching $2.7 million in 1997. They went from being a secondary firm who provided help to caterers when they had a bigger than usual event or needed some special service that regular suppliers could not provide, to a primary provider of party equipment. CEO Al Lovata claimed that the firm's emphasis on excellent service is to key to their success. As an example of the quality of Be Our Guest's service, they always make sure to wash, press and deliver their linens to clients on hangers, and even if the client requests for linens from another company who delivers their linens in boxes, Be Our Guest makes a point to iron those linens themselves and deliver them on hangers. According to the Director...
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...Darien Washington Unit 6 Corporate income tax December 1, 2013 1. Because the Church is a not for profit entity, It serves some Common good, Net earnings do not benefit the members of the organization and the organization does not exert political influence. Because of these factors The church is not subject to taxation. Eggshell however is a C corporation and will be subject to double taxation. 5. 1. The Organization serves some type of common good 2. The organization is not a for-profit entity 3, Net earnings do not benefit the members of the organization 4. The organization does not exert political influence. 14. A Private Foundation us an exempt organization subject to additional statutory restrictions on its activities and on contributions made to it. This Classification does carry disadvantage. The first one is that the classification may have an adverse impact on the contributions received by the donee exempt organization. Contributions may decline because the tax consequences for donors may not be as favorable as if the entity were not a private foundation. Second, The classification may result in taxation at the exempt organization level. Also since a private foundation is usually not a broadly, publicly supported organization, it may be subject to taxes such as Tax based on investment income, Tax on self- dealing, Tax on failure to distribute income, Tax on excess business holdings, Tax on investments that jeopardize charitable...
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...Breach of Duty Orm Jenkins Jr Grantham University In 1993, Dweck and Nasser (Chairman and controlling shareholder of Kids) and others purchased the assets of EJ Gitano. As part of the transaction, Kids was formed and designated for tax purposes as a Subchapter S Corporation so Kids' profits would be attributed pro rata to Kids stockholders (originally only Nasser). In 1994, Taxin joined Kids as Vice President of Sales and Merchandising, and Kids' sales subsequently increased by a factor of five over a four-year period. Around 1998, Dweck was issued 45% of Kids' outstanding equity. However, Dweck believed she was not being adequately compensated and so in October 2001, she formed Success Apparel LLC ("Success"), to operate as a wholesaler of children's clothing. From 2001 until 2005, Success operated out of Kids' premises using Kids' employees. Success drew on Kids' letters of credit, sold products under Kids' vendor agreements, used Kids' vendor numbers, and capitalized on Kids' relationships. Then in June 2004, Dweck founded Premium Apparel Brands LLC ("Premium"), a clothing wholesaler, which also operated out of Kids' premises, and used Kids' employees and resources. Dweck owned 100% of Premium and served as its CEO. Between 2002 and 2005, Dweck charged almost $500K in expenses to Kids and at least $172K were personal expenses, including vacations and assorted luxury goods. In March...
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...goals when choosing a structure for their business these includes protecting their personal assets from business claims that is; limited liability and having business profits taxed on their individual tax returns. The recommendation for Bill and Darlene would be an S corporation. An S corporation is a regular corporation that has elected S corporation tax status. Forming an S corporation allows for the limited liability of a corporate shareholder; however income taxes are paid based on a structure of a sole proprietor or a partnership. In an S corporation, all business profits pass through to the owners, who report them on their personal tax returns as with a sole proprietorships, partnerships, and LLCs. An S corporation is not required to pay income tax but an S corporation with more than one owner an informational tax return must be filed as is the case with a partnership or LLC, to report each shareholder's portion of the corporate income. Most states including Connecticut follow the federal pattern when taxing S corporations. They don't impose a corporate tax, but choose instead to tax the business's profits on the shareholders' personal tax return (Pope, T. 2014. P. 27; nolo.com). The formation of an S corporation has its...
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...Directors; When contemplating whether to elect to become a “Subchapter S” or not, you must consider the benefits as well as the potential problems that might arise according to the Internal Revenue Code. The Code allows certain corporations to elect not to be taxed. This is an important exception to the fundamental rule that income of a C corporation is taxed twice, first the income is taxed to the corporation when earned and then to the stockholders when paid out to them as dividends. Subchapter S, S corporation, or limited liability in corporations (among other terms), are treated as conduits for tax purposes. The tax liability is passed through to their shareholders. Although S corporations are not subject to income taxes § 6037 requires the electing corporation to file an annual information return because the corporation is still a “taxpayer” by virtue of §7701(a)(14). Where the magnitude of the...
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...CHAPTER 22 S CORPORATIONS Examination Questions 1. During 2013, an S corporation incurs the following transactions. Net income from operations $60,000 Interest income from savings account 28,000 Long-term capital gain from sale of securities 54,000 Short-term capital loss from sale of securities 44,000 The corporation's passive investment income for 2013 is: a. $28,000. b. $38,000. c. $82,000. d. $142,000. e. None of the above. 2. During 2013, Emerald Corporation incurs the following transactions. Net income from operations $125,000 Long-term capital gain from sale of securities 55,000 Short-term capital loss from sale of securities 35,000 Emerald maintains a valid S election and does not distribute any dividends to its sole shareholder, Dakota. As a result, Dakota must recognize: a. Ordinary income of $125,000 and long-term capital gain of $20,000. b. Ordinary income of $125,000, long-term capital gain of $55,000, and $35,000 short-term capital loss. c. Ordinary income of $125,000, long-term capital gain of $55,000, and $3,000 short-term capital loss. d. Ordinary income of $125,000. e. None of the above. 3. During the year, an S corporation incurs a $110,000 net operating loss. Eloise, the sole shareholder, has a $75,000 stock basis, and there is a $100,000 balance in AAA at the beginning...
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...Facts: In 2014 ABC Corporation, a calendar year taxpayer, properly deducted a $100,000 payment as an expense deduction. In late 2014, ABC elected S corporation status as of January 1, 2015. In March 2015, ABC received a recovery of $40,000 of the payment. The accountant for ABC asks “Must the repayment be reported as income by ABC (the S Corp) under that tax benefit doctrine?” If ABC reports income as a result of the refund, this income will be allocated to the shareholders of ABC for year 2015. Thus, the income will be taxed to taxpayers who did not received the benefit of the deduction in year 2014. How do you advise your client? Issue: Should ABC Corporation (The S Corp) report the repayment as income under the tax benefit doctrine? Analysis: The ABC (The S Corp) does not have to report the $40,000 repayment or recovery as income on their taxes. According to the Internal Revenue Code §111(a), it states: “Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.”( Internal Revenue Code §111(a)) Findings: In the case of Theodore A. Frederick v. Commissioner, it is very similar to ABC situation. The issue in the case was to decide whether to include an interest expense recovery as income by an S corporation. Frederick state that a recovery does not include taxable income if it was taxed to someone else other...
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...C corporations 1. Outright purchase of Smithon stock a) Should Mr. Jones purchase the stock of Smithon outright leaving Smithon intact? No, Mr. Jones should not buy the stock. A stock purchase would result in Mr. Jones acquiring the assets, liabilities and also would inherit the contractual obligations of the selling corporation. In other words, Mr. Jones has bought the existing Smithon Corporation and he is responsible of ensuring daily operations run efficiently but the tax aspect of acquisition he is responsible for existing and any future tax liabilities that the selling corporation had. I would not advise Mr. Jones to buy the stock because he will be liable for any current and future tax obligations that the selling organization had before sale. Also purchase of stock is not favorable to Mr. Jones since the tax identity of Smithon corporation does not cease not exist. The tax schedule or basis of the selling organization will not change and the tax aspects will also remain the same. The methodology and tax year will not change meaning that Mr. Jones cannot change the financial period to end in December 31. Failure to change legal entity is not advantageous to the buyer because he is limited to adhering to the current tax basis on Smithon's assets even if he had paid more for the assets. Issuing debt in Johnson Services Company to pay for the Smithon Company would raise debt equity ratio issues. Issuing debt would increase the amount of liabilities owed by...
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...1-1. What is the most important difference between a corporation and all other organizational forms? A corporation is a legal entity separate from its owners. 1-2. What does the phrase limited liability mean in a corporate context? Owners’ liability is limited to the amount they invested in the firm. Stockholders are not responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm. 1-3. Which organizational forms give their owners limited liability? Corporations and limited liability companies give owners limited liability. Limited partnerships provide limited liability for the limited partners, but not for the general partners. 1-4. What are the main advantages and disadvantages of organizing a firm as a corporation? Advantages: Limited liability, liquidity, infinite life Disadvantages: Double taxation, separation of ownership and control 1-5. Explain the difference between an S corporation and a C corporation. C corporations must pay corporate income taxes; S corporations do not pay corporate taxes, but must pass through the income to shareholders to whom it is taxable. S corporations are also limited to 75 shareholders and cannot have corporate or foreign stockholders. 1-6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal...
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...Small Business Idea Paper The government recently released funds to individuals who want to create a small business. This concept of releasing funds to individuals will create more jobs and stimulate the economy. The first step for a small business owner is to determine which of the four forms of business the organization will best fit with the new owner’s ideas. In addition, the business owner will need to review all tax legalities and implications associated with the different forms of business for her organization. This paper will discuss the four forms of business and the different types of financial statements associated with the forms of business in relation to consequences of taxes, liabilities, and accounting implications. Sole Proprietorship Sole proprietorship is the most common and easiest form of business to create. Some of the benefits of a sole proprietorship are that the owner can make decisions of hiring and firing employees, decisions of which vendors to use, what materials and equipment to purchase and what direction they want the business to take. A disadvantage is that the owner is limited to funds as a sole proprietor can only access the funds that are available. In addition, the sole proprietor is responsible for all liabilities associated with the business. The financial statement associated with at sole proprietorship is the statement of cash flow. The statements of cash flows provide financial information regarding cash receipts and payments...
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