SELECTING BUSINESS ENTITY

davinaco — Thu, 20 Jan 2011 04:53:27 +0000

Selecting business entity.
Compare and contrast the different forms of entity including the sole proprietorship, partnership, S Corporation and C Corporation, Limited Liability Company.
Entity formation
A sole proprietorship is a form of business in which one person owns all the assets and is fully responsible for all the liabilities.
A partnership is a form of business in which two or more persons or entities own all the assets and are responsible for the liabilities. It is based on a voluntary contract between these parties to create certain rights and duties among partners and with third parties. A general partnership, general partner or partners are personally liable for the debts and obligations. A limited partnership, general partners are personally liable for partnership debts, and limited partners are not liable for partnership debts beyond their capital contribution. A limited liability limited partnership (LLLP),neither the general partners nor the limited partners have personal liability for the debts and obligations of the LLLP.
A corporation is a legal entity created by the authority of state law. It is separate and distinct from its owners. A corporation may be owned by one or more persons or entities. However, some states require at least two owners. A corporation is a separate legal entity for most purposes.
Limited Liability Company is created by States, this entity has a limited liability and a separate legal entity. For tax purposes, LLC can be “disregard entity” if it has a single member and file Schedule C in Form 1040 individual, LLC can be a partnership if it has two members or more, or LLC can file Form 1120 if it selects in Form 8832 and 1120S if it selects file Form 2553.
S corporation must be a small business corporation. The following additional requirements must be met in order to be a small business corporation:
-Must be a domestic corporation. Corporation must have no more than 100 shareholders. A corporation must be only eligible shareholders, individual (other than nonresident aliens), estates, and certain trusts. A corporation must have only one class of stock (common stock) and must not be an ineligible corporation.
Capital contribution
A sole proprietorship’s access to the capital is limited to personal funds plus any loans he or she can obtain. A sole proprietorship is solely responsible for owner-financing. The issuance of ownership interest in return for funds terminates the sole proprietorship. A sole proprietorship bears the risk of loss of the business; that is, the owner will lose his or her entire capital contribution if the business fails. In additional, the sole proprietorship has unlimited personal liability. Therefore, creditors may recover claims against business from the sole proprietorship’s personal assets.
A partnership is better able to owner-finance than is a sole proprietorship because it has more owners. They contribute assets and receive in exchange an interest in the partnership’s capital and future income. Contributions of property in exchange for partnership interest are generally treated as non-taxable exchanges with no gain or loss recognized either to the partnership or to its partners. The liable of the contribution depend the form of a general partnership, a limited partnership or a limited liability limited partnership.
A corporation does not recognize a gain or loss on the receipt of money or other property in exchange for its stock. A corporation does not recognize income when it receives money or other property as a contribution to capital. However, the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered. One advantage of a corporation’s capital structure is raised capital from shareholders by issuing stock or non-shareholders by issuing debt. The shareholders are liability limited to capital contribution.
The S corporation allows be tax free to the contributing shareholder provided with three conditions are met: (1) property is transferred to the corporation, (2) stock is received by the contributing shareholders, and (3) contributing shareholders receive 80 percent control of the corporation.
Operations
A sole proprietorship is the simplest form of operation, the owner has the right to make all management decisions concerning the business.
A general partnership, all partners must agree to the participation of each co-partner, all partners have equal rights in the conduct and management of the partnership business. A limited partnership, general partners manages the business and are personal liable for partnership debts. A limited liability limited partnership, the general partner manages the business and does not have personal liability for the debts and obligations of LLLP.
A corporation’s shareholders own the corporation. They are not agents of the corporation and the only management duty they have is the right to vote on matters such as the election of directors and the approval of fundamental changes in the corporation. The board of directors is responsible for formulating policy decisions that affect management, supervision, control, and operation of the corporation. The board has the authority to appoint the officers of the corporation. The officers are responsible for the day-to-day operation of the corporation.
S corporation may operate almost the same as a corporation and S corporation election for Federal tax purposes only.
Distributions and Taxation
A sole proprietorship is treated as a separate entity for accounting purposes, it is not a separate legal entity. A separate tax return is not filed for a sole proprietorship, its results from operations are reported on Schedule C (Profit or Loss from Business of Form 1040 (U.S. Individual Income Tax Return). The net income or loss is included with the taxpayer’s other income, losses, and deductions for the year and is subject to a tax rate from 10 percent to 35 percent.
A partnership as such is not subject to the income tax. The partnership’s operating income is reported on page 1 of Form 1065. Each partner is required to include in their individual tax return their distributive share of the ordinary income or loss of the partnership (Form K-1).
A C corporation is separate taxpaying entity. It files Form1120 (U.S. Corporation Income Tax Return). All its income and expenses are reported in this return and it pays a tax that ranges from 15 percent to 39 percent. The shareholders are not liable for a tax based on the corporation’s income. Shareholders must include dividend distribution in their taxable income. Tax rate is 5% for taxpayers in the 10% or 15% bracket and 15% for all other brackets.
S corporation is not a separate taxpaying entity. It files Form 1120S (U.S. Income Tax Return for an S corporation), but in general does not pay an income tax. Their income, expenses, gains, losses, credits, etc. pass through to the shareholders. Schedule K-1 (Shareholders’ Share of Income, Credits, Deductions, etc.) contains each shareholder’s share of these items.

DAVINACO

SELECTING BUSINESS ENTITY