There are various forms of business entities including sole proprietorships, partnerships, S corporations, and regular or C corporations. C corporations are separate taxable entities that report income and expenses on Form 1120 and are subject to double taxation as income is taxed at the corporate level and again when distributed as dividends to shareholders. When selecting an entity form, non-tax issues to consider include liability, capital raising ability, transferability of ownership interests, and continuity of the business.

1. Chapter 2 Corporations: Introduction and Operating Rules Copyright ©2009 Cengage Learning Corporations, Partnerships, Estates & Trusts

2. Various Business Forms Sole proprietorships Partnerships Trusts and estates S corporations Regular corporations (also called C corporations)

3. Sole Proprietorship Not a separate taxable Income reported on owner’s Sch. C

4. Partnership Separate entity, but does not pay tax Allocates partnership income to partners Partners report partnership income on personal tax returns Files information return (Form 1065)

5. S Corporation Separate entity, only pays special taxes (e.g., built-in gains) Allocates entity income to shareholders Shareholders report entity income on personal tax return Files information return (Form 1120S)

6. C Corporation Separate tax-paying entity Reports income and expenses on Form 1120 Income is taxed at corporate level and again at owner level when distributed as a dividend

7. Dividends Double taxation - dividend distributions are not deductible by the corporation and are taxable to the recipient For years after 2002 individuals are taxed as if they had received Long Term Capital Gains Generally, dividends are taxed at same marginal rate applicable to a net capital gain Thus, individuals otherwise subject to the 10% or 15% marginal tax rate pay 0% tax on qualified dividends received Individuals subject to the 25, 28, 33, or 35 percent marginal tax rate pay a 15% tax on qualified dividends

8. Corporate Income Tax Rates

9. Nontax Issues in Selecting Entity Form (slide 1 of 3) Liability Sole proprietors and some partners have unlimited liability for claims against the entity Capital-raising Corporations and partnerships to a lesser extent can raise large amounts of capital for entity ventures

10. Nontax Issues in Selecting Entity Form (slide 2 of 3) Transferability Corporate stock is easily sold, but partners must approve partnership interest transfer Continuity of life Corporations exist indefinitely

11. Nontax Issues in Selecting Entity Form (slide 3 of 3) Centralized management Corporate actions are governed by a board of directors Partnership operations may be conducted by each partner without approval by other partners