M4A1: Organization Forms and Taxation

M4A1 Keno Enriquez posted Mar 5, 2018 11:46 AM

C Corporations

C corporation is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code. In an S corporation, the profits are passed on to the shareholders, and are taxed based on personal returns. A regular corporation (also known as a C corporation) is taxed as a separate entity. The corporation must file a Form 1120 each year to report its income and to claim its deductions and credits.

A C corporation can deduct the cost of benefit as a business expense. For example, they can write off the entire costs of health plans established for employees as business expenses. These benefits are tax-free even for those receiving them.

S Corporations

S corporations are corporations that elect 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.

The big benefit of S-corp taxation is that S-corporation shareholders do not have to pay self-employment tax on their share of the business’s profits. For example, Larissa is the sole owner of her S-corporation, an advertising agency. Her revenues from the business are $50,000 per year, and her annual expenses (not counting salary) total $10,000. Therefore, her S-corp’s profit for the year (before subtracting her own salary) is $40,000.

Limited Liability Companies (LLCs)

A limited liability company (LLC) is a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship

Although LLCs have some attractive features, they also have a number of disadvantages, especially in relation to the structure of a corporation. A LLC has to be dissolved upon the death or bankruptcy of a member, unlike a corporation, which can exist in perpetuity. Also, a LLC may not be a suitable option when the objective of the founder is to eventually become a publicly listed company.

LLC members are considered self-employed business owners rather than employees of the LLC so they are not subject to tax withholding. Instead, each LLC member is responsible for setting aside enough money to pay taxes on that member's share of the profits. The members must estimate the amount of tax they'll owe for the year and make quarterly payments to the IRS.

References:

IRS (2017). S Corporations. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

Limited Liability Company – LLC (n.d). Retrieved from https://www.investopedia.com/terms/l/llc.asp

Jones, S., Rhoades-Catanach, S. (03/2014). Principles of Taxation for Business and Investment Planning, 2015 Edition, 18th Edition. [Argosy University]. Retrieved from https://digitalbookshelf.argosy.edu/#/books/1259562867/

Yvette Roberson posted Mar 3, 2018 10:33 PM

M4 A1 Discussion

Organization Forms and Taxation

 

Describe the tax treatments of regular (or C) corporations, S corporations, and limited liability companies (LLCs)

The three types of entities (C corporation, S corporation, and LLC) all partially shield the individual owners of certain types of personal liability, have varying benefits regarding fundraising and stock option grants, have different tax implications, and may provide the company with greater credibility among investors, clients, and customers. 

Compare the tax treatments to identify the similarities and differences.

C corporations, S corporations, and LLCs provide you with personal liability protection. S corporations and LLCs are commonly used for small business activities. Both enable you to grow your business and take on new owners. Both pass through income to the owners who report it on their personal returns. Both cost about the same to set up, depending on the filing and ongoing fees imposed by the state in which you incorporate. One key difference is how owners are affected by employment taxes.

 

From the organization's point of view, what are the implications of the different tax treatments?

S corporation shareholders are employees of their corporation so Social Security and Medicare (FICA) taxes apply to the compensation they receive, but not to distributions they receive.

An S corporation is different from a regular (or C) corporation only in that it elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code of the IRS. Congress created Subchapter S in the tax code in 1958 to promote entrepreneurship and small businesses. S corporations combine the benefits of partnerships (single taxation) with the limited liability offered by corporations. C corporations, on the other hand, allow for more flexibility in the number and type of shareholders, as well as different classes of stock.

LLC members are self-employed individuals who owe Social Security and Medicare taxes, paid by self-employment tax on their share of business net income. Incorporating or forming an LLC provides advantages to business owners that operating a business as a sole proprietorship or general partnership does not.

 Reference

Diffen (N.D.) C Corporation vs. LLC. Retrieved March 2018, From https://www.diffen.com/difference/C_Corporation_vs_LLC