Business Entities Flashcards
(35 cards)
What are the 5 types of business entities?
Sole proprietorship, partnership, limited liability partnership, corporation, limited liability company.
Which are the easiest to form?
Proprietorships and partnerships.
Which type of entity does NOT get liability protection?
Proprietorships, general partnerships, general partners of a limited partnership have limited liability protection.
LLP - limited liability partners - only have limited liability protection.
What taxes does a sole proprietor pay?
Up to 15.3% on his own income + 1/2 of employees social security
How do you calculate self-employment tax?
Net income x 92.35% (withholding deductions) = Net earnings.
(Net earnings x 12.4% up to 142,800) + (2.9% x all income) = Self employment tax.
What is the self-employed contribution rate?
Contribution rate to other participants ÷ (1 + contribution to other participants)
Calculate the Keogh plan contribution
Net self-employ income - 1/2 SE taxes = Earned income X SE contribution rate = Keogh contribution
What is Schedule C?
SE income and expense
What is a general partnership?
How do you set one up?
It’s the simplest kind of partnership. It usually doesn’t require filing a form to set it up.
What is one difficulty of a general partnership?
Getting everyone to agree to make a decision.
Do general partnerships need EINs?
Yes, if they have employees.
How am I taxed if I contribute services in exchange for a share in a partnership?
I must declare the value of my services as OI. This value is then the basis for my share.
What is the legal liability of general partners?
Absolute.
How are general partnerships taxed?
They file form 1065 and schd. K. This shows all income distributed to partners. Ea. Partner then passes the income thru to his 1040.
Each partner’s income is then subject to 15.3%
Can general partners receive employee fringe benefits?
Can they contribute to a retirement plan?
No—they’re not employees.
Yes if they make the same calculations a sole proprietor makes to contribute to a Keogh.
How are general partners taxed?
They report their earnings as ordinary income, pay self-employment tax on it, and increase their basis by it.
How are partner withdrawals taxed?
As a return of basis until basis is zero, then as a capital gain.
What are advantages/disadvantages of general partnerships vis a vie proprietorships?
Management is more complex, as is selling partnership interests. Taxation is more complex.
Liability is still massive.
Easier access to capital, counsel, skills.
What is a limited partnership?
How do they work?
It is a hybrid of a general partnership and a limited liability partnership.
Limited partners have limited liability as long as they have no management role. Their income is ordinary income. Losses are passive losses.
Must file annually with state.
What is a limited liability partnership?
Usually a group of professionals. The limited liability means they hold no liability for the acts of the other partners.
What is a family limited partnership?
It’s a structure used to transfer assets to a younger generation using annual exclusions and valuation interests.
How do Family Limited Partnerships FLPs work?
One family member transfers appreciated assets into the FLP in exchange for a 1% interest. He becomes the general partner, and the others are limited liability partners.
He begins gifting partnership assets to family members. These are valued at maybe 30% discount since the LPs have no control over them and they’re not very marketable. He also uses annual exclusions to keep the gifts from being taxable.
Do the generational tax benefits in the FLP hold up to IRS scrutiny?
Yes as long as the business keeps going and the family stays out of it. When funds are co-mingled it can lose its status as a partnership.
How is an LLC with 2 or more members taxed?
It has choice! Can either be as a partnership, an s-corp. or a c-corp.
