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Chapter 12: Choice of Business Entity

Terms in this set (17)

•Cost of entity formation and operation
•Either passthrough entity type will have no up-front income tax cost, but will incur legal, accounting, and professional fees for the formation.
•Owners must file a timely subchapter S election with the IRS and incur the incremental cost of monitoring the ownership structure to comply with S corporation eligibility requirements.
•An S corporation may be more expensive to operate than a partnership because of state tax costs.

•Flexibility of income and loss sharing arrangements
•Partnerships offer the most flexibility- they can create special sharing ratios for different items of income, gain, deduction, and loss. The partners can amend their agreement every year. However, it is costly to amend the partnership agreement, and it must be done each time there is a change in the partners.
•S corporations can have only a single class of stock. Each share must represent an identical claim on the income and assets of the business.
•Self-employment tax
•General partners and LLC members who work for the LLC must treat their share of the entity's business income as net earnings from self-employment.
•Shareholders in S corporations are not considered to be self-employed.

•Owner liability
•S corporations avoid unlimited personal liability for claims against the business.
•In traditional partnerships, general partners have unlimited liability for business debt.
•Traditional partnerships have been replaced by LLPs and LLCs.
•In an LLP, a partner is not personally liable for malpractice-related claims arising from the professional misconduct of another partner.
•In an LLC, every member has limited liability for all debts of or claims against the business.
•Partners receive tax basis for liabilities of the partnership, increasing the deductibility of losses. S corporation shareholders don't.