What are the merits of the three major legal forms of organization?

Answer 1

1. SOLE PROPRIETORSHIP
Advantages
*avoid state corporate income tax
*ease of formation
*no double taxation of income or gain from sale of business assets
*deductions for ordinary and necessary business expenses and deductions for losses taken by owner personally to extent of other income (including spouse's income if reported on joint return) and without any basis limitation

2. CORPORATION
Advantages
*limited liability, provided --
i) sufficient equity
ii) observe corporate formalities
*100% deduction for health insurance
*exclude 50% of gain on sale of stock (if original issue and held five years)
unavailable for business in which the principal asset is the reputation or skill of one or more employees (such as doctors, lawyers, accountants, financial planners, and other consultants)
*take ordinary loss deduction on sale or exchange of stock, up to $50,000 ($1000,000 if filing joint return)
*exclude cost of $50,000 life insurance
*maximum pension and profit sharing
*different classes of stock
*perceived to be sophisticated form of business
*top tax bracket is lower than top individual bracket

2a. S Corporations
Advantages
*same limited liability as regular corporation
*state corporate income tax is lower than a regular corporation
*possible partial avoidance of Social Security tax
*no double taxation of income or gain from sale of business assets
*losses may be deducted personally by the shareholders in proportion to their ownership interest, subject to basis limitations

3. PARTNERSHIP
Advantages
*no double taxation of income or gain from sale of business assets
*deductions for ordinary and necessary business expenses taken by partners personally to extent of other income, subject to basis limitation
*flexible allocations of items of income and deductions

4. Limited Liability Companies
Advantages
*avoids use of limited partnership to structure deal with non-resident aliens that require special allocations or flow-through of gain and loss
*structure deals that could not be done through S Corporations due to identity or number of shareholders or single class of stock limitations
*structure deals that would be cumbersome through use of partnership having S Corporations as partners due to the large number of participants

Click on the link to learn the definitions of each of these types, the formation procedures, and the disadvantages of each.

Answer 2

Legal Forms Of Organization

Answer 3

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