Corporation as One of the Most Convenient Business Entities - Research Paper Example

 Business is considered to be one of the most profitable sources of income. With new and innovative powerful marketing mechanism, the business industry is gaining more momentum today than before. And with more and more people getting involved in small businesses, the industry has attained a rather competitive environment. This makes business an uncertain opportunity; new businesses are opened every day while a substantial number of them fall prey to bankruptcy. This further means that the success of any business enterprise depends on its strict adherence to business laws and ethics enforced by relevant authorities. Some of the important business entities with regard to taxation policies and reforms are discussed here. Sole proprietorship One of the simplest and most widely used business entities across nations is sole proprietorship. According to common definition, sole proprietorship is a business conducted by an individual, who owns all the properties as well as tangible and intangible business assets. A limited liability company (LLC) with one owner is the general notion of a sole proprietorship. Although there is no formal requirements for starting sole business enterprises, there are two things that matter a lot - obligations and liability of the proprietor. Taxation is another important aspect in sole proprietorship. In such business entity, the share of profit or loss in the business is reported directly to the business owner. Legal and taxation implications in the United States mentions the clauses for sole proprietorships. Particularly in the State of Florida (Tax Implications of LLCs and Corporations), the owner of the organisation must fill out Schedule C (Profit and Loss from Business) and add it to his or her personal income tax return (Form 1040). If the owner faces any loss in business, it reduces the amount of income earned on this form. In case of profit, the owner must pay Social Security, Medicare and Federal Tax. It is notable that the State of Florida does not charge a sole proprietor of any additional state income tax if he or she earns profit from the sole proprietorship. General partnership A limited liability company or LLC can be treated as a general partnership when there are two or more owners in a business enterprise. The State of Florida does not claim any formal documentation for the general partnerships. However, consultation with a legal council is recommended for the parties before forming any general partnership. This is significant in order to check on fraud considerations. In a similar manner to that of the US, the United kingdom also observed a new legal form known as the limited liability partnership (LLP) in 2001. However, the UK LLP is not suitable to the small trading business concerns. The LLP legislation in the UK is rather complicated. Even though it offers the possibility of tax reduction, it is not convenient due to lack of tax neutrality. In case of the US multiple-owner LLCs, the owners in general partnerships must use Schedule E with reporting their personal income tax returns. Besides, they require to file a partnership information return on Form 1065. This includes information on the source as well as distribution of the money among the co-owners. The profit or loss earned in the business is shared equally by the owners. The State of Florida differentiates between sole proprietorship and general partnership in terms of payment of the profit earned. Unlike sole proprietorship, the profit earned in general partnership is not subject to Social Security and Medicare taxes. It is not liable to state and federal income taxes. Sole proprietorship as well as general partnership is a tax-reporting entity, not a tax-paying entity. The share of profit passes through the owner or owners and it is divided among them according to what is specified in the partnership agreement. There is a substantial scope of allocating income among the business partners on the basis of which partner has the highest tax rates. According to Uniform Partnership Act (UPA), the co-owners of a general partnership require to sign a written partnership agreement before forming a partnership. This is considered as the legal assistance to reduce the chances of disputes among the business owners. The agreement also contains the rights and responsibilities of the partners as well as the distribution of assets and division of profits among them. Limited partnership A limited partnership (LP) consists of two or more persons working together for the profits of a business enterprise. This is different than general partnership as a limited partnership includes at least one general partner and one limited partner. While the general partner avails unlimited personal liability, the liability of the limited partner in LP is limited to the amount of his or her investment in the business. It is mandatory for limited partnerships to file the state income taxes. One of the most significant objectives of limited partnerships is to raise capital for the business enterprise. According to the Revised Uniform Limited Partnership Act (RULPA) in the US amended in 1985, a limited partner is not liable as a general partner unless he or she takes control of the business. The limited partner does not have the power to control the business if he or she is a member of the board of directors. A limited partner can enjoy the benefits of passed-through taxation on certain conditions. The limited partnership requires to meet a minimum number of criteria related to - limited liability, centralised management, duration and transferability of ownership. If the limited partnership is unable to meet the minimum criteria, then it is taxed as a corporation. Apart from the issue of control by the limited partner, a limited partnership can also face another significant issue of defective filing. A potential problem with filing for a renewal limited partnership is that if one forgets to file a renewal, he or she may lose limited liability without knowledge. Section 11 of Uniform Limited Partnership Act (ULPA) addresses various situations related to this issue. It states the responsibilities and functionalities of a general partner, the negligence of which can cost him or her the obligation of a general partner. The limited partner’s active participation in the business can cost the partner lose his or her limited liability. It is significant that only the general partner has the absolute power to conduct all kinds of business affairs and transactions including withdrawal of all partnership funds from bank account, hiring or firing managers, etc. Corporation One of the most convenient business entities in larger countries is corporation. One quality that sets it apart from other business entities is the flexible nature of corporations. Therefore, corporations can flexibly adapt to any business sizes, management operations, cost, growth and compensation. The popularity of corporations in the US business industry is quite impressive. Another significant quality of corporations is its limited liability clause. A corporation provides limited liability for the investors, including its owners. What is most important for any successful business is the factor of raising capital. A corporation makes it easy for the owner or owners of a business enterprise to raise money required for the expansion, research and development of the business. The corporation raises money by selling its stock. This attracts investors because of its limited liability issue. The tax implications of a corporation can be a little more expensive. The corporation as a separate business entity requires to file its own tax returns and pay taxes on its income. In the State of Florida, corporations are liable for separate federal and state taxes. Corporations must report their net income on Form 1120 and F-1120 in the State of Florida. Besides, the shareholders availing any distribution of the corporation are taxed at the individual level. This kind of taxation is known as double taxation. Subchapter C of the 1986 IRS code or the C corporation (C-corp) in the US mentions the federal tax ranges for corporations. Depending on the corporation’s taxable income, the federal tax rate ranges from a minimum of 15% to a maximum of 35%. The standard tax rate for corporations at the federal level in the US is 34%-35%. However, the state tax rates are different in various states. There are different ways for corporations to reduce the burden of double taxation. Paying year-end bonuses is the most common way of tax reduction. Another effective way to reduce taxation is to form a general partnership or a limited liability company that owns the equipment used in the business. The rental fees for the equipment can be a convenient option for channelling income. There is another concept of S corporation mentioned in subchapter S in section 1362 of the IRS code. The S corporation is given similar characteristics of general partnership for tax purposes while being labelled as a corporation. S corporations follow the limited liability clause, but they are not double taxed. S corporation is a better choice than a C corporation as the latter requires a higher selling price to make up for the tax differences to the owners. It is easy for a corporation to change from C to S corporation, but not vice-versa. An important key document in a corporation is the shareholders agreement that is related to risk and control issues. The agreement regulates the distribution of shares, entry/exit clauses of shareholders, contract clauses for shareholders, etc. The shareholders should remain strictly adhered to the contract clauses as well as the corporate opportunities directly in line of the business. While forming a corporation, the partners should accordingly divide the earnings, assets and management of the business. Corporations offer equity compensation plans that use stock options. One type of stock options is the Incentive Stock Option (ISO), which allows employees to purchase stock at a fair market value on the date when the options were granted. The employees are not required to pay tax for such options when exercised. It is encouraging to find various nations, and federal and state governments enforce different statutory laws encompassing a wide range of business forms and entities. The business entities discussed above are some of the most popular and widely sought-after options in all small and big countries. The four concepts of business entity - sole proprietorship, general partnership, limited partnership and corporation - are the basic forms of business organisation available in the business industry of any region. Whether one wants to go alone on a business venture or in partnership, it is recommended to consult with a business lawyer in order to determine which form of business organisation is best suited for him. Business laws are particular about the benefits of the entities, which eventually help investors in making the right business choices. Enforcement of various taxation policies with regard to different types of business entities is a significant step. This will definitely bring in a positive business environment in the industry. On a more personal level, the business laws are helpful in assisting small and aspiring entrepreneurs with choosing the right kind of business entity. This makes a lot of sense as the right business choice can lead an individual or partnership to his or their success, or doom. Reference “Tax Implications of LLCs and Corporations”. Toolkit Media. http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P12_4710 Read More