Chapter 2 Part 1

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  • entity (1040, schedule C)
  • Chapter 2 Part 1

    1. 1. Chapter 2 <ul><li>Corporations: </li></ul><ul><li>Introduction and Operating Rules </li></ul>Copyright ©2009 Cengage Learning Corporations, Partnerships, Estates & Trusts
    2. 2. Various Business Forms <ul><li>Sole proprietorships </li></ul><ul><li>Partnerships </li></ul><ul><li>Trusts and estates </li></ul><ul><li>S corporations </li></ul><ul><li>Regular corporations (also called C corporations) </li></ul>
    3. 3. Sole Proprietorship <ul><li>Not a separate taxable </li></ul><ul><li>Income reported on owner’s Sch. C </li></ul>
    4. 4. Partnership <ul><li>Separate entity, but does not pay tax </li></ul><ul><li>Allocates partnership income to partners </li></ul><ul><ul><li>Partners report partnership income on personal tax returns </li></ul></ul><ul><li>Files information return (Form 1065) </li></ul>
    5. 5. S Corporation <ul><li>Separate entity, only pays special taxes (e.g., built-in gains) </li></ul><ul><li>Allocates entity income to shareholders </li></ul><ul><ul><li>Shareholders report entity income on personal tax return </li></ul></ul><ul><li>Files information return (Form 1120S) </li></ul>
    6. 6. C Corporation <ul><li>Separate tax-paying entity </li></ul><ul><ul><li>Reports income and expenses on Form 1120 </li></ul></ul><ul><ul><li>Income is taxed at corporate level and again at owner level when distributed as a dividend </li></ul></ul>
    7. 7. Dividends <ul><li>Double taxation - dividend distributions are not deductible by the corporation and are taxable to the recipient </li></ul><ul><li>For years after 2002 individuals are taxed as if they had received Long Term Capital Gains </li></ul><ul><ul><li>Generally, dividends are taxed at same marginal rate applicable to a net capital gain </li></ul></ul><ul><ul><ul><li>Thus, individuals otherwise subject to the 10% or 15% marginal tax rate pay 0% tax on qualified dividends received </li></ul></ul></ul><ul><ul><ul><li>Individuals subject to the 25, 28, 33, or 35 percent marginal tax rate pay a 15% tax on qualified dividends </li></ul></ul></ul>
    8. 8. Corporate Income Tax Rates
    9. 9. Nontax Issues in Selecting Entity Form (slide 1 of 3) <ul><li>Liability </li></ul><ul><ul><li>Sole proprietors and some partners have unlimited liability for claims against the entity </li></ul></ul><ul><li>Capital-raising </li></ul><ul><ul><li>Corporations and partnerships to a lesser extent can raise large amounts of capital for entity ventures </li></ul></ul>
    10. 10. Nontax Issues in Selecting Entity Form (slide 2 of 3) <ul><li>Transferability </li></ul><ul><ul><li>Corporate stock is easily sold, but partners must approve partnership interest transfer </li></ul></ul><ul><li>Continuity of life </li></ul><ul><ul><li>Corporations exist indefinitely </li></ul></ul>
    11. 11. Nontax Issues in Selecting Entity Form (slide 3 of 3) <ul><li>Centralized management </li></ul><ul><ul><li>Corporate actions are governed by a board of directors </li></ul></ul><ul><ul><li>Partnership operations may be conducted by each partner without approval by other partners </li></ul></ul>

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