copyright © 2011 by jeffrey pittman chapter 18 – corporations
TRANSCRIPT
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COPYRIGHT © 2011 BY JEFFREY PITTMAN
Chapter 18 – Corporations
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Comparison
The following slides review business enterprise law and provide a comparison base for examining corporations
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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
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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
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Sole Proprietorship
The sole proprietorship owner has unlimited liability for business torts or contracts and s/he pays taxes on income earned
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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 contractsPartnership income passes through to
individual partners, who are responsible for income taxes
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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
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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
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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
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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
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Factors to Consider When Comparing Business Enterprises
Selected comparison factors include the following:Difficulty of forming the organizationLiability exposureTax considerationsContinuity of existence/ability to transfer ownershipManagement and controlFinancingLicensesLocation
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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 defendantclaiming a tort
or breach of contractoccurred
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Simple Tax Example13
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
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Simple Tax Example14
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)
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Selected Corporate Tax Rates - 2010
Taxable income over
Not over Tax rate
$ 0 $ 50,000 15%
50,000 75,000 25%
75,000 100,000 34%
100,000 335,000 39%
335,000 10,000,000 34%
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Reducing the effects of double taxation
Slides 13 and 14 provided an illustration where the corporate form could result in additional taxes of $9,900There are a variety of strategies to reduce this additional tax billOne tax strategy is selection of the S Corporation status, if possible
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