entrepreneurship - mgt602 power point slides lecture 29

7/28/2019 Entrepreneurship - MGT602 Power Point Slides Lecture 29

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ENTREPRENEURSHIP

Lecture No: 29BY

CH. SHAHZAD ANSAR


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THE ORGANIZATIONALPLAN (Contd)


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TAX ATTRIBUTES OF FORMS OF

BUSINESSTax Issues for Proprietorship

For the proprietorship the IRS treats thebusiness as the individual owner.

All income is personal income and the businessis not taxed as a separate entity.

The proprietorship has some tax advantagescompared to the corporation.

a. There is no double tax on profits.b. There is no capital stock tax or penalty forretained earnings.


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TAX ATTRIBUTES OF FORMS OFBUSINESS (Contd..)

Tax Issues for Partnership.

The partnerships tax advantages and disadvantagesare similar to the proprietorship.

Limited partnerships can provide unique taxadvantages.

Both the partnership and proprietorship have a legalidentity distinct from the partners, but this identity isonly for accounting purposes.

The income is distributed based on the partnershipagreement, and the owners then report their share aspersonal income.


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TAX ATTRIBUTES OF FORMS OFBUSINESS (Contd..)

Tax Issues for Corporation

The corporation has the advantage of beingable to take many deductions not otherwise

available. The disadvantage is that dividends are taxed

twice.

This double taxation can be avoided if the

income is distributed as salary. The corporation tax may also be lower than

the individual rate.


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S CORPORATIONS

The new law provides more flexibility to SCorporation with regard to:

1. Number of shareholders.2. Who can be allowed to own shares?3. The role of trusts as stockholders.4. The ability of S corporations to own more than

90 percent of stock of another corporation.5. Distribution of profits.6. Issuance of different classes of stock.7. Rules affecting the tax basis of incurred loses.


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ADVANTAGES OF AN SCORPORATION

1. Capital gains or losses are treated as personal income.

2. Shareholders retain limited liability protection.

3. It is not subject to a minimum tax, as C corporationsare.

4. Stock may be transferred to low-income-bracket familymembers.

5. Stock may be voting or nonvoting.

6. This form may use the cash method of accounting.

7. Corporate long-term capital gains and losses aredeductible by the shareholders.


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DISADVANTAGES OF AN SCORPORATION

1. Even with the new regulations, there are still somerestrictions.

2. If the corporation earns less than $100,000, then the CCorporation would have a lower tax liability.

3. The S Corporation may not deduct most fringe benefitsfor shareholders.

4. The S Corporation must adopt a calendar year for taxpurposes.

5. Only one class of stock, common stock is permitted.6. The net loss of the S Corporation is limited.


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THE LIMITED LIABILITYCOMPANY

A popular new entity is the limited liability company (LLC),which offers similar advantages as the S Corporation but withmore liberal tax rules under subchapter K. This form is apartnership-corporation hybrid with the following characteristics:

Where the corporation has shareholders, the LLC has members.

No shares are issued, and each member owns an interest in thebusiness. Liability does not extend beyond the members capital

contribution. Members may transfer their interest only with the unanimous

written consent of the remaining members.

The standard acceptable term of an LLC is 30 years. The laws governing formation of the LLCs differ from state to

state


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DESIGNING THEORGANIZATION

Stage 1: The new venture is operated by oneperson, the entrepreneur, with no need for submanagers.

Stage 2: As the business expands, the

organization may be described as Stage 2.Sub managers are hired to coordinate, organize,and control aspects of the businessMeasurement, evaluation, rewards, selection,

and training become necessary. Stage 3may exist when the firm is large

enough that a third level of managers is added

entrepreneurship - mgt602 power point slides lecture 29

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