Income Tax Entity Choice Flashcards
(34 cards)
What are the formation requirements for a sole proprietorship?
Easist to set up; no formal filing required except possibly a local business license and EIN.
Who has legal liability in a sole proprietorship?
The owner has unlimited personal liability
How is a sole proprietorship taxed?
No separate business tax return; owner files Form 1040 with Schedule C; all income is self-employment income and subject to self-employment tax; pass-through taxation
How does a sole proprietor receive compensation?
Through draws (not salary); reported on Schedule C
Who manages a sole proprietorship?
The owner manages the business.
What are the formation requirements for a general partnership?
Simple; partnership agreement recommended but not required.
Who has legal liability in a general partnership?
Unlimited liability for all partners.
How is a general partnership taxed?
Files Form 1065 (informational return); issues Schedule K-1 to each partner; income flows through to pater’s Form 1040; general partners’ income is self-employment income.
How are general partners compensated?
Through distributions; reported on K-1.
Who manages a general partnership?
All partners manage the business.
What are the formation requirements for a limited partnership?
Requires formal filing with the state.
Who has legal liability in a limited partnership?
General partners have unlimited liability; limited partners have liability limited to their investment and typically do not manage.
How is a limited partnership taxed?
Same as GP; files Form 1065; issues K-1s; limited partners’ income is ordinary income (not self-employment income unless actively involved).
What are the formation requirements for an LLC?
Requires state filing (Articles of Organization).
Who has legal liability in an LLC?
Limited liability for all members.
How can an LLC be taxed?
Flexible-can elect to be taxed as a sole proprietorship (single-member), partnership (multi-member), S corporation, or C corporation.
How are LLC members compensated?
Member draws (Schedule C or K-1); if taxed as S or C Corp, can pay W-2 wages.
Who manages an LLC?
Member-managed or manager-managed.
What are the formation requirements for an LLP?
State filing required.
Who has legal liability in an LLP?
Limited liability for all partners.
How is an LLP taxed?
Files Form 1065; issues K-1 to partners; income flows through to Form 1040; income is generally self-employment income.
How are LLP partners compensated?
Distributions; reported on K-1.
Who manages an LLP?
All partners can manage.
What are the formation requirements for an S corporation?
State filing (Articles of Incorporation); must elect S status with IRS (Form 2553).
