COPYRIGHT © 2011 BY JEFFREY PITTMAN

Chapter 18 – Corporations

Comparison

The following slides review business enterprise law and provide a comparison base for examining corporations

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Business Enterprises

There are a variety of legal forms a business may take

The “best” legal form for a given business depends on a variety of factors

Which form is best may change over time

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Sole Proprietorship

A sole proprietorship is a business owned by one person  

Generally, there is no state regulation of sole proprietorships except: Licenses required for all business Fictitious name filings

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Sole Proprietorship

The sole proprietorship owner has unlimited liability for business torts or contracts and s/he pays taxes on income earned

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Partnerships

A partnership is an association of two or more persons to carry on as co-owners a

business for profit (UPA §6)Partners have individual and joint unlimited

liability for partnership torts and contractsPartnership income passes through to

individual partners, who are responsible for income taxes

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Limited Partnerships

A limited partnership is a specialized form of a partnership, with general and

limited partners The firm must have at least one limited partner

and one general partner

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Limited Partnerships

Unlike regular (general) partnerships, limited partnerships can exist only after successfully filing a certificate of limited partnership with the appropriate state official

Losses for limited partners are generally limited to the amount of their capital contribution

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Limited Liability Companies

A limited liability company (LLC) is a hybrid legal entity combining corporate

and partnership characteristic LLCs provide the limited liability of a

corporation and the tax attributes of a partnership

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Limited Liability Companies

Owners are called members, and LLCs are managed either by members or outside managers

Members liability is limited to the amount of their investment

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Factors to Consider When Comparing Business Enterprises

Selected comparison factors include the following:Difficulty of forming the organizationLiability exposureTax considerationsContinuity of existence/ability to transfer ownershipManagement and controlFinancingLicensesLocation

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Liability Principles

2. a) A business is liable

for employee torts under respondeat superior;

b) A business is liable for contracts under agency law principles

3. Business owners are potentially liable for

business debts, depending on the business form

1. A plaintiff sues the defendantclaiming a tort

or breach of contractoccurred

Simple Tax Example13

We have a single taxpayer who owns a business but does not work in the business; the business net income is $75,000 and the taxpayer has outside employment income of $95,000.

If a sole proprietorship is used as the business form, federal taxation is at the personal level only

For 2010, the federal personal income tax on $75,000 in additional income (beyond the $95,000 salary) would be assessed at a marginal rate of 28%, approximately $21,000, leaving $54,000 in after-tax business income

Simple Tax Example14

Using the same taxpayer as in the previous slide,If a corporation form of business is used, the

corporation will pay federal tax of approximately $13,750 (see the following slide for corporate tax information)

If the remaining $61,250 is distributed as dividends to the shareholder, an additional personal income tax of approximately $17,150 will be assessed (28% * $61, 250; this is the essence of double taxation, as the money was first taxed at the corporate level)

The total federal tax bill with the corporation structure will be $30,900 ($13,750+$17,150), leaving $44,100 after tax income ($75,000-$30,900)

Selected Corporate Tax Rates - 2010

Taxable income over

Not over Tax rate

$ 0 $ 50,000 15%

50,000 75,000 25%

75,000 100,000 34%

100,000 335,000 39%

335,000 10,000,000 34%

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Reducing the effects of double taxation

Slides 13 and 14 provided an illustration where the corporate form could result in additional taxes of $9,900There are a variety of strategies to reduce this additional tax billOne tax strategy is selection of the S Corporation status, if possible

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