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