Question1:Taxrules and treatment applicable to corporations and partnerships
Apartnership has two or more individuals who agree on how to dividevarious duties in the business. In contrast, a corporation is ownedby a group of shareholders, which makes it a more complex structurethan other business entities mainly due to the tax regulations.According to the Internal Revenue Service, both business entitieshave to pay taxes, but at different levels. The partnership tax rulesdo not require the business to pay taxes as a separate entity(Balouziyeh, 2013). Instead, the profits pass through to the owners.Subsequently, the partners are required to report the profits earnedon their individual tax returns, which should also include theirshare of deductions, income, and tax credits. Additionally, thepartners have to pay income tax on their earnings and theself-employment taxes such as Medicare and social security. However,the partners do not enjoy additional tax relief when their businessperforms poorly (Balouziyeh, 2013).
Onthe contrary, a corporation is considered a legal entity, which hasto pay separate income taxes. These businesses are subjected todouble taxation at the corporate and shareholders’ level. Thecorporations pay income taxes on profits, which mean that theshareholders are not required to pay the self-employment taxes(Ayers, et al., 2015). Nevertheless, if the company’s owners workfor the company, they pay individual income taxes on their bonusesand salaries like any other regular employees. Then again, unlikedividends, the salaries and bonuses are considered tax-deductiblebusiness expenses hence, the corporation does not pay taxes on them.The dividends are distributed to the shareholders who must pay tax onthe bonuses they receive when they file their personal tax returns.Furthermore, the shareholders have to pay personal taxes such asMedicare and social security on the personal returns for what theyare paid throughout the year. Nonetheless, they do not pay taxes onfringe benefits (Ayers, et al., 2015).
Question2:Apartnership over a corporation
Abusiness owner might opt for a partnership due to certain advantagesthat are not available in a corporation. Forming a partnership offersan advantage since the owners do not have to register with the state,and pay an often hefty fee as in the case of corporations.Partnerships have uniform rules across the states unlikecorporations, which are registered under the state laws and have topay taxes at both state and federal level. Hence, the fee forregistering a partnership is uniform in almost every state, whichmakes future expansion into other states relatively easy (Balouziyeh,2013).
Anotheradvantage of a partnership is the increased liability to raise funds.The partnerships’ tax rules allow the owners to accumulate morecapital since it does not place restrictions on the contributions.Accordingly, each partner contributes money or assets depending onhis or her financial capabilities and the number of shares they wantto have in the business. Besides, they all add skills and knowledgeto help manage the business (Balouziyeh, 2013). Therefore, there aremore innovative ideas, which helps the business attain its goals andfor solving problems that may hinder success.
Question3: Tax benefits of a partnership as opposed to a corporation
Thenagain, a partnership can have more tax advantage as compared to thecorporations. The profits earned in a partnership pass through to theowners who then report the money on their individual tax returns(Balouziyeh, 2013). The profits are only taxed once at the owners’level rather than being subject to double taxation as in the case ofcorporations. As a result, the business does not bear tax burden ofprofits. Furthermore, filing the tax income for a partnership is easyas compared to the corporations. Each partner is responsible forreporting and paying his or her tax return, which reduces the burdenof extensive paperwork and expenses for the business (Balouziyeh,2013).
Question4:ACorporation over a Partnership
Alternatively,a C-corporation can offer advantages, especially when putting intoconsideration the tax rules. The corporation tax laws can betime-consuming due to reporting and pay taxes on separate corporatetax returns (Schneeman, 2013). However, the different taxation levelsallow the owners to retain some of the profits in the business at theend of the year to fund future growth and expansion. These funds areonly taxed using the corporate income tax rates, which are lower ascompared to most shareholders’ marginal income tax rates for thesame amount of income. Thus, the owners can save money by keepingsome profits in the business without facing tax penalties, unlikepartnerships where the partners have to pay taxes on profits even ifthey leave the money in the business for future expenses (Schneeman,2013).
Althoughthe dividend income in a C-corporation is subjected to doubletaxation, the business can reduce the taxable income by deductingmost of the expenses. For example, expenses such as the fringebenefits, salaries, and interest payments since they are notsubjected to double taxation (Ayers, et al., 2015). Moreover, thebusiness can deduct the full cost of fringe benefits provided to theemployees and the shareholders, which are taxed at an individuallevel. Once the corporation pays dividends to the shareholders, thosepayments are taxed at the corporate level income tax. These dividendsare taxed at capital gain rates as opposed to individual’s topmarginal tax rate. Accordingly, each shareholder will owe income taxon his or her share of the benefits. In spite of this, theshareholders’ dividends are not subject to the 3.8 percent tax onnet investment income that is paid by higher-income taxpayers or 0.9percent Medicare surtax on earnings (Ayers, et al., 2015).
Question5:Choosingthe type of entity that is best for the goals and vision of thebusiness
Choosingthe most suitable business entity allows an entrepreneur to limitliability exposure, reduce taxes, and ensure that the business can befinanced and managed efficiently. First, it is vital to consider thetype of legal structure suitable for the goals and vision of thecompany. The legal structure will affect how the business, partners,or shareholders will pay taxes (Balouziyeh, 2013). Besides, it willdetermine the amount of paperwork the owners will be required tosubmit at any particular time. The legal structure also defines thepersonal liability the entrepreneurs will face and their ability toraise capital. However, this is not an easy decision so, thebusiness owner has to conduct research on the different types oflegal entity (Balouziyeh, 2013). In the process, he or she will findout the requirements, laws, and regulations governing each type ofbusiness, which will be crucial information when selecting aparticular legal structure. For example, the entrepreneur can seekcounsel from business experts when considering the advantages anddrawbacks of each business entity (Balouziyeh, 2013).
Additionally,it is necessary to examine the complexity of the ownership structureby taking into consideration the unique requirements of the businessand the personal needs of the owners. Every business entity is uniqueand offers different benefits to owners (Balouziyeh, 2013). Theflexibility level of each structure determines the ease indecision-making, management, and during future expansions. Therefore,the entrepreneur can conduct research on the issues of ownershipespecially when the business involves more than one person. They canalso research on the flexibility of the company especially if one ofthe partners leaves or is unable to continue being an active memberof the business (Balouziyeh, 2013).
Ayers,B Weaver, C., Spilker, B. Worsham, R. Robinson, J., Outslay, E. &Barrick, J. (2015). McGraw-Hill’sTaxation of Individuals and Business Entities.(7thEd.).New York: McGraw-Hill Education.
Balouziyeh,J. (2013). Alegal guide to United States business organizations: The law ofpartnerships, corporations, and limited liability companies.Berlin: Springer.
Schneeman,A. (2013). Thelaw of corporations and other business organizations.Clifton Park, NY: Delmar Cengage Learning.