Pittman, Chapter 18 Slides
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Transcript Pittman, Chapter 18 Slides
Chapter 18 – Corporations
COPYRIGHT © 2011 BY JEFFREY PITTMAN
Comparison
2
The following slides review business enterprise law
and provide a comparison base for examining
corporations
Business Enterprises
3
There are a variety of legal forms a business may
take
The “best” legal form for a given business depends
on a variety of factors
Which form is best may change over time
Sole Proprietorship
4
A sole proprietorship is a business owned by
one person
Generally, there is no state regulation of sole
proprietorships except:
Licenses required for all business
Fictitious name filings
Sole Proprietorship
5
The sole proprietorship owner has unlimited liability
for business torts or contracts and s/he pays taxes on
income earned
Partnerships
6
A partnership is an association of two or
more persons to carry on as co-owners a
business for profit (UPA §6)
Partners have individual and joint unlimited
liability for partnership torts and contracts
Partnership income passes through to individual
partners, who are responsible for income taxes
Limited Partnerships
7
A limited partnership is a specialized form of
a partnership, with general and limited
partners
The firm must have at least one limited partner and
one general partner
Limited Partnerships
8
Unlike regular (general) partnerships, limited
partnerships can exist only after successfully filing a
certificate of limited partnership with the
appropriate state official
Losses for limited partners are generally limited to
the amount of their capital contribution
Limited Liability Companies
9
A limited liability company (LLC) is a hybrid
legal entity combining corporate and
partnership characteristic
LLCs provide the limited liability of a corporation and
the tax attributes of a partnership
Limited Liability Companies
10
Owners are called members, and LLCs are managed
either by members or outside managers
Members liability is limited to the amount of their
investment
Factors to Consider When Comparing
Business Enterprises
11
Selected comparison factors include the following:
Difficulty of forming the organization
Liability exposure
Tax considerations
Continuity of existence/ability to transfer ownership
Management and control
Financing
Licenses
Location
Liability Principles
12
2.
1. A plaintiff sues the defendant
claiming a tort
or breach of contract
occurred
a) A business is liable
for employee torts under
respondeat superior;
b) A business is liable for contracts
under agency law principles
3. Business owners are potentially
liable for
business debts, depending on the
business form
Simple Tax Example
13
We have a single taxpayer who owns a business but does
not work in the business; the business net income is
$75,000 and the taxpayer has outside employment
income of $95,000.
If a sole proprietorship is used as the business form,
federal taxation is at the personal level only
For 2010, the federal personal income tax on $75,000
in additional income (beyond the $95,000 salary)
would be assessed at a marginal rate of 28%,
approximately $21,000, leaving $54,000 in after-tax
business income
Simple Tax Example
14
Using the same taxpayer as in the previous slide,
If a corporation form of business is used, the corporation
will pay federal tax of approximately $13,750 (see the
following slide for corporate tax information)
If the remaining $61,250 is distributed as dividends to
the shareholder, an additional personal income tax of
approximately $17,150 will be assessed (28% * $61, 250;
this is the essence of double taxation, as the money was
first taxed at the corporate level)
The total federal tax bill with the corporation structure
will be $30,900 ($13,750+$17,150), leaving $44,100
after tax income ($75,000-$30,900)
Selected Corporate Tax Rates - 2010
Taxable
income over
$
0
Not over
Tax rate
$ 50,000
15%
50,000
75,000
25%
75,000
100,000
34%
100,000
335,000
39%
335,000
10,000,000
34%
15
Reducing the effects of double taxation
16
Slides 13 and 14 provided an illustration where the
corporate form could result in additional taxes of
$9,900
There are a variety of strategies to reduce this
additional tax bill
One tax strategy is selection of the S Corporation
status, if possible