Supplement Chapter 11 © 2013 - Jeffrey Pittman. We begin our discussion of business organizations...

SupplementChapter 11

© 2013 - Jeffrey Pittman

We begin our discussion of business organizations by examining issues of business and owner responsibility

Also, see my Business Enterprises Chart

Business Organizations

J. Pittman, Instructor 2

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

3

Comparison

J. Pittman, Instructor

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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Business Enterprises


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

There are more sole proprietorships in the U. S. than any other business organization

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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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Sole Proprietorship


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

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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 Partnerships


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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Limited Liability Companies


Definition of a corporation from old England – “[A] collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.” - A Treatise on the Law of Corporations, Stewart Kyd (1793-1794)

Corporations

J. Pittman, Instructor 12

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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Factors to Consider When Comparing Business Enterprises


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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Liability Principles


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 2011, 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 Illustration


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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Simple Tax Illustration


Selected Corporate Tax Rates - 2011

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%

17J. Pittman, Instructor

The prior slides 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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Reducing the Effects of Double Taxation


Supplement Chapter 11 © 2013 - Jeffrey Pittman. We begin our discussion of business organizations...

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