Chapter 10 1. Sole proprietorship: unincorporated business activity owned by an individual 2.

Disposition of business assets -> recognized gains and loss in form 4797. Sells business equipment as a gain , report on section 1245 depreciation recapture 3. Employer identification number from sole proprietor 4. Employer payroll tax a. Social security tax of 6.2% b. Medicare tax 1.45% 5. SE tax: sole proprietors are self-employed and must pay this tax on their business income. SE TAX rates is the combined employer / employee payroll tax rates and the social security base is the same for both taxes 6. Partnerships: unincorporated entities created by contractual agreement among 2/more business associates 7. General partnership: all partners have unlimited personal liability for debts incurred by the partnership 8. Limited partnership: in which one or more limited partners are liable for partnership debt only to the extent their capital contributions to the partnership 9. LLPS limited liability partnerships: individuals who perform professional services for patients or clients, such as doctors, attorneys and CPAs 10. Passthrough entities: partnerships serve only as conduits of income 11. Partnerships frequently recognize items of income, gain, expense or loss that dont relate to business operations or charity, are reported on Schedule K of Form 1065 and allocated to partners for inclusion on the partners return. These separately stated items retain their tax character as they pass through to the partners 12. Schedule K-1 provides detailed information concerning the partners distributive share of the partnerships ordinary business income or loss and any separately stated items 13. Guaranteed payments: partners who work for their partnership on a continual basis expect to be compensated based on the value of their work a. Guaranteed payments to partners are analogous to the salaries paid to partnership employees . partners report guaranteed payments as ordinary income 14. LLCs limited liability company are alternatives to a general or limited partnership. It is a unincorporated legal entity owned by one or more members a. An LLC with only one member (i.e. one owner) is a disregarded entity for federal tax purposes 15. Subchapter S corporation: is a corporate entity a. For those who wanted to avoid both the corporate income tax and the risk of unlimited personal liability b. Limited liability of shareholders. If a corporation gets into financial trouble and cant pay its debts, the corporate creditors have no claim against the personal assets of the shareholders 16. Eligible corporations to be S corporations

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a. Only individuals, estates, certain trusts, and tax-exempt organizations may be shareholders. Nonresident aliens cannot be shareholders. This requirement ensures that the S corporations income is taxed at the individual rates b. Number of shareholders is limited to 100. Family may elect for all family members to be treated as one shareholder c. Corporation can have only a single class of outstanding common stock, an S corporation cannot include preferred stock in its capital structure . because of this requirement, shares of stock in an S corporation carry identical rights to corporate profits and assets Subchapter S Election: an eligible corporation becomes an S corporation by the unanimous election of its shareholders Tax basis in S corporation stock: a shareholders initial tax basis in stock issued by an S corporation equals the cash plus the adjusted basis of any property transferred to the corporation in exchange for the stock Schedule K-1: Shareholders share of income, credits, deductions, etc informs owners of their pro rata share of business income or loss and any separately stated items In the case of sole proprietorship, the business income is included in the owners taxable income and taxed at the individual rates In the case of a general or limited partnership, LLC or S corporation, the business income is allocated to the owners of the entity. The income is taxed directly to the partners, members, or shareholders at their marginal rate.

Chapter 11 1. Closely held corporations: privately owned by a relatively small number of shareholders 2. Publicly held corporations: stock in it is traded on established securities markets such as the NY stock exchange. Ownership of these corporations diffused over thousands of shareholders and may change on a daily basis 3. Limited liability of shareholders: reason why entrepreneurs operate in the corporate form a. The rights of corporate creditors and other claimants extend only to the corporate assets and not to the personal assets of the corporations owners b. Financial institutions may refuse to lend money to closely held corporate business unless the shareholders personally guarantee repayment of the debt c. Licensed professionals, such as physicians cannot avoid personal liability for their negligence or misconduct by operating in the corporate form 4. Corporations: 4 characteristics a. Unlimited life of corporation: corporations are persons separate and distinct from their owners b. Free transferability: of equity interests in corporations c. Buy-sell agreement: stock in closely held corporations is usually subject to this. This agreement may prohibit the owner from disposing the stock without approval of the other shareholders, or it may restrict the owner from transferring the stock to

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anyone but the existing shareholders or the corporation itself to protect the ownership of the business from outsiders d. Centralized management: of a corporation, a corporation not directly managed by its owners Affiliated group: a corporation compartmentalized into several corporate entities. They consist of a parent corporation that directly owns 80% or more of at least one subsidiary corporation plus all other subsidiaries that are 80% owned within the group Consolidated tax return: an affiliated group may elect to file a consolidated tax return one return reporting the combined results of the operations of all corporations in the group Nonprofit corporations: nontaxable entities . organizations that are devoted to the public good Form 1120: corporations report their taxable income and calculate the federal tax on that income Dividends received deduction: corporations that receive dividends from other taxable, domestic corporations are entitled to this deduction a. If the recipient corporation owns less than 20% of the stock of the paying corporation, the deduction = 70% of the dividends received b. If the recipient corporations owns at least 20% but less than 80% of the stock of the paying corporation, the deduction = 80% of the dividends received c. If the recipient corporation owns 80% or more of the stock of the paying corporation, the deduction = 100% of the dividend received

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