Business Finance - Management 8.3 (390)- Assignment: Business Plan
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BUSW_390_Entity_Comparison.pdf
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BUSW 390 Business Entity Comparison
Corporation Partnership LLC
Shareholder, Stockholder General Partner Member
Officer, Director General Partner Manager
Articles of Incorporation Partnership Agreement Articles of Organization
Corporate Bylaws Partnership Agreement Operating Agreement
Stock, Share Partnership Interest Membership Interest
C Corporation S Corporation Partnership LLC
Filing Requirements:
Every
corporation (except exempt)
must file
regardless of the amount of
income or loss. It
must file even if it stops conducting
business. Filing
ends when totally dissolved.
Every corporation
(except exempt) must file,
regardless of the
amount of income or loss. It must file
even if it stops conducting
business. Filing
ends when totally dissolved.
Every
partnership that engages in a
trade or
business must file a return,
regardless of the amount of
income or loss.
If the partnership
does not receive
income and does not incur
any expenses,
the partnership is not required
to file a return. However, the
partnership is
considered terminated
when business or financial
operations are
no longer carried on by
any of its
partners.
Same rules as a general partnership
- must file a return,
regardless of the amount of income
or loss.
Filing Deadline:
By the 15th day
of the third
month following
the close of the tax year.
By the 15th day of
the third month
following the close
of the tax year.
By the 15th day
of the fourth
month following
the close of the tax year.
By the 15th day of
the fourth month
following the close
of the tax year.
Extension
Deadline and Form Number:
Form 7004,
Application for Automatic
Extension of Time to File
Form 7004,
Application for Automatic
Extension of Time to File Corporation
Form 8736
extends deadline three
months. Form 8800 extends
Form 8736 extends
deadline three months. Form 8800
extends the deadline an
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All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
Corporation
Income Tax
Return, extends
the deadline six
months. A second
extension is not available.
Income Tax
Return, extends
the deadline six
months. A second
extension is not available.
the deadline an
additional three
months.
additional three
months.
College of Business | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
Advantages For federal
income tax
purposes, a C corporation is
recognized as a separate
taxpaying entity.
The corporation conducts
business, realizes net
income or loss
on the business activity, pays
taxes and
distributes the profits to its
shareholders.
This creates a double tax effect.
Income is taxed to the corporation as
earned and taxes again when
distributed to the shareholders as
dividends. The corporation does
not get a tax
deduction when it distributes
dividends to its
shareholders.
A corporation formed under
state law will generally shield
owners from
liability for the corporation's
actions. A stockholder's risk
of loss is
generally limited
An S corporation
conducts business
as a corporation, but is taxed in the
same manner as a partnership. The
advantage of an S corporation is that
income passed
through to shareholders
avoids the double taxation that
occurs with a C
corporation.
Contribution of appreciated
property to an S corporation is a
tax-free event if
the contributing shareholders
control 80% or more of the stock
after the
contribution.
An S corporation can own up to
100% of the stock
of a C corporation.
Law prevents an S corporation from
filing a consolidated
return with an affiliated C
corporation.
An S corporation
can elect to treat a wholly owned
subsidiary as part
of the S corporation for tax
purposes.
Partners pay tax
on partnership
income on their own individual
returns. Partnership
profits and
losses, as well as other tax
items, are passed through
to the partners
on Schedule K- 1. Partners are
taxed on their
distributive
share of partnership
items. whether or not they are
distributed to
the partner.
Business income from a
partnership is
generally computed in the
same manner as an individual
would on
Schedule C or
F, and net profit is passed
through as ordinary income
to the partner on Schedule K-1.
Other items of
partnership income, such as
interest, dividends, capital gains
and rental income are
computed separately from
An LLC has the
same pass-through
features of an S corporation which
avoids double taxation of profits.
It has the flexibility
of a partnership without the
restrictions of an S
Corporation.
In comparison to a limited partnership,
an LLC offers
limites liability protection for all
members, whereas
the general partner in a limited
partnership has unlimited liability.
Also, if a limited
partner in a limited partnership
participates in management, the
limited partner is
exposed to personal liability.
An LLC member
who participates in management is
generally not
exposed.
A contribution of
appreciated
propety to an LLC as a partnership is
tax free regardless of how much
control the
contributing partner
has (whether 1% or
College of Business | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
College of Business | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
to the amount
invested in stock.
This is in contrast to sole
proprietors or
general partners in partnerships
who are personally liable
for the debts of
the business.
Stockholders are
not subject to tax
on income unless dividends
are paid.
Ownership may
be easily
transferred.
Stockholders
need not file
returns in additional states
in which the corporation does
business.
No limits restrict the number or
type of
stockholders, or classes of stock.
Company stock is
available for
employee benefit plans.
Therefore, the
subsidiary is
disregarded for tax purposes. The
subsidiary does
not need to be an S corporation, but
it must be a corporation that
would qualify as
an S corporation if
its stock was held by the
shareholders of
the parent S corporation.
Unlike a partner in a partnership, a
shareholder's portion of S
corporation taxable income is
not subject to self-
employment (SE)
tax. However, if the shareholder
performs services for the
corporation, the shareholder must
be paid a
reasonable wage (subject to FICA,
FUTA and state unemployment
taxes.)
Unlike a partner in a partnership, S
corporation
liabilities do not increase a
shareholder's basis. The only
exception to this
rule is if a shareholder loans
money directly to an S corporation.
Note: A
shareholder's personal
guarantee of a loan to an S
business
income and are
also passed through to the
partner on
Schedule K-1.
And individual
reports ordinary income from a
partnership on Schedule E of
Form 1040.
Other items of income or loss
are reported on
the appropriate forms or
schedules.
Assets that are
transferred into the partnership
by the partners are considered
co-owned by all
the partners. No one partner has
a claim against a specific asset.
The lifetime of a
partnership is generally limited
by the lifetime of
each of the partners.
A partner can
bind the other
partners to a contract as long
as the act is within the scope
of the
partnership's field of business.
Cash withdrawls
are generally not taxable,
since the partner reports
and pays tax on
99% owner).
Liquidation of an
LLC as a
partnership is generally a tax-free
event.
Income is passed
through to members, rather
than taxed at the entity level.
There are few legal requirements
relating to
management structure or
meetings.
Partners who contribute property
into the LLC
recognize no gain.
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All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
corporation is not
sufficient to
increase basis;
the shareholder must have primary
responsibility for
repayment. Rather than
personally guaranteeing a
loan to an S
corporation, the shareholder
should take out a personal loan,
then loan the
proceeds directly to the S
corporation.
his/her
distributive
share of
income, even if the income has
not yet been distributed to
the partner.
College of Business | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
Disadvantages Unlike
partnerships, various types of
income do not retain their
character as they
pass through the corporate entity.
The corporation does not act as a
conduit when
making distributions to
shareholders.
A C corporation is not eligible to
hold stock in an
S corporation.
Distributions made to
shareholders out
of the earnings and profits of the
corporation are generally
considered
taxable dividends.
Distributions which are
considered a
return of capital are not taxable.
A corporation
Liquidation of an
S corporation interest is a
taxable event and is treated as if the
corporation sold
the liquidated assets at their fair
market value (FMV) to the
shareholder.
An S corporation
can have only one class of stock.
The corporation is
treated as having only one class of
stock if all
outstanding shares of the
corporation prossess identical
rights to distribution and
liquidation
proceeds. Differences in
voting rights are allowed as long as
the other
requirements are met.
Each general
partner is personally liable
for all partnership
liabilities.
Distributions are
taxable when they are treated
as a guaranteed
payment or if the distributions
are considered a liquidation or
sale of part or
all of a partner's
capital interest. Distributions in
excess of a partner's basis
are also taxable.
An LLC must have
at least two members, in
contrast to an S corporation that
can have a single
shareholder. Although some
states allow single-
member LLCs, the business is not
allowed to file as a
partnership for federal tax
purposes. A single-
member LLC files Schedule C as a
sole proprietor unless it elects to
be taxed as a
corporation.
Earnings are
generally subject to
self-employment (SE) tax. (The Internal
Revenue Code
does not
specifically address
the issue of SE tax on an LLC
member's distributive share of
income. In fact,
section 935 of the Taxpayer Relief Act
College of Business | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
College of Business | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
does not
recognize gain or
loss when cash is distributed to a
shareholder.
Distributions of cash or property
will reduce a corporation's
earnings and
profit, but not its taxable income.
Corporate losses
(operating and
capital) are not deductible by
shareholders.
Approval of
existing shareholders is
generally not
required if stock is sold to a third
party.
The legal
requirements for a complex
management structure and
annual meetings
make corporations
more expensive to maintain.
Capital gains and dividends are
taxed as ordinary income.
Equity and dividends must
be allocated in
proportion to stock ownership.
of 1997 states that
no regulations
defining a limited partner for
purposes of SE tax
could be issued before 7/1/98. As of
2002, there were
still no regulations stating whether an
LLC member's
distributive share of income is subject to
SE tax, even for LLC members who
are actively
engaged in business
operations. Note: Payments for
services are
considered guaranteed
payments under the Code.
Guaranteed
payments are subject to SE tax
for partners and LLC members
regardless of the
recipient's status.)
State law may limit
the life of the LLC.
As a partnership, if
50% or more of the capital and profit
interests are sold or exchanged within a 12-month period,
the LLC will
terminate for federal tax
purposes.
If more than 35% of
losses can be allocated to non-
managers, the LLC
may lose its ability to use the cash
method of
College of Business | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.
accounting.
LLCs cannot take advantage of
incentive stock options, engage in
tax-free
reorganizations, or issue Section 1244
stock.
Lack of uniformity in LLC statutes.
Businesses that operate in more
than one state may
not receive consistent
treatment.
Some states do not
tax partnerships, but they do tax
LLCs.
Minority discounts
for estate planning
purposes may be lower in an LLC
than a corporation. Since LLCs are
easier to dissolve,
there is a greater access to the
business assets.
Conversion of an
existing business to LLC status could
result in tax recognition on
appreciated assets.
- Business Entity Comparison
