COPYRIGHT © 2011 BY JEFFREY PITTMAN Chapter 18 – Corporations

Comparison The following slides review business enterprise law and provide a comparison base for examining corporations 2

3 Business Enterprises 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

4 Sole Proprietorship 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

5 Sole Proprietorship The sole proprietorship owner has unlimited liability for business torts or contracts and s/he pays taxes on income earned

6 Partnerships 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

7 Limited Partnerships 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

8 Limited Partnerships 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

9 Limited Liability Companies 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

10 Limited Liability Companies Owners are called members, and LLCs are managed either by members or outside managers Members liability is limited to the amount of their investment

11 Factors to Consider When Comparing Business Enterprises 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

12 Liability Principles 2. 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 1. A plaintiff sues the defendant claiming a tort or breach of contract occurred

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 Taxable income over Not overTax rate $ 0$ 50,00015% 50,00075,00025% 75,000100,00034% 100,000335,00039% 335,00010,000,00034% 15

Reducing the effects of double taxation 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 16