Posted: April 24th, 2025

wk 2 practice models

INSTRUCTIONS!!

Discuss the various practice models discussed in Chapter 3 of

The Ernst and Young Business Plan GuideLinks to an external site.

. What model is the most attractive for your own consultancy? Why? Do you see the model for your practice changing in the future? 

 READ CHAPTER 3!! OF THE FILE UPLOADED TO COMPLETE THIS .

planning stand in the way of making good business decisions

.

Given that, it is hard to play
down the importance of a structure that has saved tens of millions of dollars over time.

The successful business determines what is important and focuses on it. If employee
ownership is important, it is even more important to be structured in a way that is
understandable and where rewards can be realized. Too often, incentive programs come
with enough tax complexity that the benefits are overlooked. When receiving an annual
salary, taxes are due at ordinary rates. Employees get used to this and understand it. Other,
more tax-efficient, forms of compensation are, by design and law, more complex. But it is
important for entrepreneurs to keep sight of the overall goals. It is better to give someone
a dollar and have him or her keep 65 cents and appreciate it than it is to give that person a
dollar where the individual gets to keep 80 cents but doesn’t quite understand.

Choosing the legal form under which a business will operate used to be one of the more
complex decisions an entrepreneur had to make when organizing a new business or purchasing
an existing business. Today, however, due to tax- and corporate-law changes that began in the
early 1990s and accelerated through the decade and into the first years of the twenty-first
century, new businesses are increasingly organized as limited liability companies (LLCs). This
chapter outlines various reasons for organizing and operating a business in a particular way.
The information is not exhaustive; indeed, whole books have been written on the subject.

While many entrepreneurs consider the LLC the optimal choice, there are still reasons to
choose to organize a business in a different way. There are often considerations that go beyond
the simplicity of the LLC. The question of legal form is one that should be studied carefully by
an entrepreneur or executive contemplating a change in corporate organization, working in
close consultation with lawyers and tax accountants.

MAJOR VARIABLES
The four major variables an entrepreneur or executive must deal with when choosing the legal
form of a business are:

1. Liability

2. Control

3. Ease of bringing in new investors

4. Taxes

In general, all businesses are organized as sole proprietorships, partnerships, or corporations.
There are variations possible within each of these designations. All options should be
evaluated. To assist in the examination of the various legal forms, the entrepreneur or executive
must consider the following issues:

Will the entrepreneur be the sole owner? If not, how many other people—either operators
or passive investors—will have an ownership interest? How much control will each

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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owner have? In what manner will the risks and rewards of the business be shared? Is it
expected that people will be able to buy and sell their ownership interests freely or with
great restrictions?

How important is it for all owners to limit personal liability for debts of or claims against
the business?

Which form of business organization affords the most advantageous tax treatment for both
the business and the individual owner(s)?

What legal form is the simplest and least expensive, both to establish and to maintain?

What are the business’s long-term plans?

Sometimes, the answers to these questions conflict with one another. At this point, professional
assistance by lawyers and accountants can help sort out the issues. The remainder of this
chapter examines the four major variables and then considers various legal forms against each
one.

LIABILITY
We live in a litigious society. While insurance is the primary vehicle by which we protect
ourselves against unanticipated claims and damages, the form of a business can afford a
secondary line of defense against potential losses of material amounts of net worth. Financing
arrangements might create a situation wherein a lender may want an entrepreneur to put
personal assets on the line, but there is no reason to expose personal assets to claims in the
event of actions beyond the owner’s control, such as mishaps on business property or
otherwise related to the business. For these reasons, many entrepreneurs want to adopt a
business form that limits their personal liability.

Various state laws, including the laws of operating in a profession such as medicine, law, or
architecture, include clauses that limit the ability to totally shield oneself from personal
liability. However, for a consumer-driven business or any other business, it is important to
consider liability protection in the business plan.

A sole proprietorship does not offer the protections that other forms of business organizations
offer. This is the cost of the simplicity in operations and structure that are the primary benefits
of the sole proprietorship. Legal liability for defective products, accidents, credit defaults, and
other types of claims fall directly on the single owner. While insurance can sometimes protect
against these risks, and personal asset-protection planning can offer some sophisticated
alternatives for protection, a sole proprietorship has a high level of personal risk. Therefore,
many businesses, even if a sole proprietorship is appropriate for a host of other reasons,
choose to organize as a separate legal entity.

Similarly, a general partnership also involves a high level of personal exposure to claims.
While a general partner cannot be personally sued for the actions of his partners, the risks of
the business are shared by all the partners. A business failure can cause a claim on personal
assets beyond what is generated from, or initially invested in, the business.

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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Given these risks, many businesses initially adopt a structure that offers protection against risk.
Again, the primary vehicle for protecting against most forms of risk is insurance, but organizing
a business in a way to insulate personal assets from claims resulting from the business should
be a primary consideration in the decision concerning what form of business to utilize.

While limited partnerships are sometimes used to organize new businesses, the ability of this
form of business organization to protect the founder from risk is somewhat limited. A limited
partnership offers a way for an entrepreneur to raise money from outside investors, and
provides these investors an investment vehicle that insulates them from risk, potentially offers
some tax benefits, and minimizes their role in the business so as to not dilute control. However,
every limited partnership needs a general partner; therefore, someone can potentially be at risk
for the claims against the business. This can be mitigated by creating a corporate entity to serve
as the general partner. Such a creation is an example of how certain planning devices offer
solutions but have an offsetting cost in increased complexity in running the business and
adhering to corporate formalities.

A corporation offers a higher level of risk protection. In general, absent special situations, the
assets and liabilities of the corporation are separate from the owners. While the owner’s entire
investment is at risk, personal assets cannot be attached to pay the claims of the business.
Corporations, as we discuss later, come in several different varieties, each offering somewhat
different tax and other characteristics.

As the introduction to this chapter indicated, a relatively new vehicle is the limited liability
company (LLC). These devices, formed according to state corporate law, offer protection from
liability and a great deal of flexibility around many other issues such as taxation, ease of entry
and exit, and so on. For this reason, many new businesses, whether start-up ventures owned by
entrepreneurs or new divisions of major corporations, are organized as LLCs. The vehicle can
operate with one or many owners and can be relatively straightforward to operate. As with any
choice of entity for business reasons, however, it is important to operate according to the form
you choose. Operating as an LLC has some hurdles to be cleared in order to avail yourself of
the benefits it offers.

CONTROL
Another crucial decision is the issue of who will control a new business and how that control
will be sustained. If you are the only person with invested capital in the business and the only
person operating the business, the issue of control is relatively moot. However, if you need to
raise money from other investors, or if you have several employees, the issue of control
becomes much more important. This is an issue for all businesses; the takeover battles and
proxy fights that began in the 1980s and continue to this day are an indication of how important
the issue of control is to all companies.

Control can be gained through legal means by operation of law or by agreement. Certain types
of entities have implied positions concerning control.

For instance, by definition, a limited partner in a partnership typically has little or no input into

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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operations, although a limited partnership agreement can grant limited partners some say in the
operations.

A corporation is run by its officers and directors; the status of shareholders allows them to
participate in the election of the board of directors, but does not offer any special operating
rights or control other than the votes their shares represent. The ability to control the voting of
a majority of the shares usually implies control over the corporate entity, although it is not
uncommon for shareholder agreements to offer some concessions. In privately held companies,
it is common to offer a minority investor some control over the selection of one or two board
members, even though absent an agreement the entire board could be elected by the majority
shareholder. An investment agreement can provide certain triggers, upon the occurrence of
things good or bad, that shift the control between the parties.

A general partnership operates according to a partnership agreement. These documents can
cover a host of legal and tax issues as well as simple issues such as division of duties and
operating rights and responsibilities.

Obviously, a sole proprietor does not face the same issues of control as an owner in a more
complex business organization. However, as a business grows and hires employees, it is
important to have an organizational structure in place with defined titles and, more importantly,
rights and responsibilities. A sole proprietor will be responsible for the actions of his or her
employees, and therefore their duties must be clearly defined in employee manuals, training
devices, or similar items. Even though a sole owner legally has control, to the outside world
the people they deal with in your organization who appear to operate with authority have an
implied level of control. It is easier to give guidance about what the company’s policies are in
advance than to try to argue that employees did not have the authority to make certain decisions
later.

A limited liability company is run by a board of managers. These are typically identified in the
LLC’s initial operating agreement. Again, certain agreements between the members may result
in representation on this board in ways that are disproportionate to ownership.

Frequently, lenders want some opportunity to influence management or control. This can be
accomplished through loan agreements that provide for representation on boards or
management committees and in other ways. Loan agreements can be written with triggers that
cause certain things to happen or give the lender certain rights if certain operating goals are not
met.

EASE OF ADMITTING NEW INVESTORS
Growth and access to capital is an essential ingredient for any business’s success. A business
started by two people developing an idea in a garage could be initially funded by the owners,
but at some time there will come a need to find new money and admit new investors. This
event could occur several times during a company’s life. Venture capital funding is typically
not a one-time event. There are specialized funds that typically invest in businesses at different
stages of their growth cycle. And, even prior to the ability to access any venture capital, a

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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business might raise money from friends and family or angel investors.

While each funding event is a major transaction and creates a need for specialized legal, tax,
and financial advice, the initial choice of a business form can affect the ability to raise money
in the future or minimize some of the collateral effects of financial transactions on existing
shareholders.

A corporation’s ability to raise money by issuing more stock is limited by its bylaws and
articles of incorporation. A corporation has to initially make a determination of how many
shares of common stock it is authorized to issue. This is a seemingly simple decision, and
intuitively you might say, “Why not make it as high as possible?” However, many companies
have been surprised by the Delaware Franchise Tax, which imposes a tax that can be
calculated by the number of authorized shares. In our practice, we have seen companies take
steps, prior to initial public offerings (IPOs), to increase the number of authorized shares of
stock. Then, for one reason or another, the IPO is postponed and the company is faced with a
much higher Delaware Franchise Tax based on this new number of authorized shares.

In the corporate form a company can issue new shares of stock to investors without observing a
lot of formalities, so the incremental funding is fairly simple. Once that business is publicly
traded and subject to the oversight of the Securities and Exchange Commission (SEC), there
might be some requirements to file certain financial data with the SEC prior to issuing those
shares, but in general, new investors can be admitted to a corporation without affecting the
existing shareholders or involving them in the process. In a smaller business, organized in
corporate form, shareholders’ agreements and voting-trust agreements might need to be revised
as part of this process.

A partnership structure also creates the need for additional documentation at the time of
admitting a new investor. Again, these issues can be addressed in the initial partnership
agreement, which can cover many issues such as valuation methodology, antidilution rights of
the current owners, and so on. To be admitted to a partnership, the new investor needs to do
more than just write a check. The new investor needs to review and sign the partnership
agreement to signify becoming a member of the partnership. Certain venture funds or
institutional investors have their own issues that might prevent them from investing in
partnerships. For instance, a pension-fund investor might need to be concerned with certain tax
consequences of directly owning interests in an active business. Certain mutual funds or
venture firms also want to invest only in corporations, so their tax affairs are not affected by
the tax affairs of the companies in which they invest.

A sole proprietorship by definition won’t have outside equity investors. To raise equity money,
the entrepreneur gives up some equity in the ownership; therefore, a sole proprietorship will
automatically evolve into a multiowner business operating in a different format.

LLCs operate similarly to partnerships with respect to raising money from new investors. The
operating agreement indicates how new investors can be admitted and typically covers many of
the tax effects of that transaction. There are no preset limits from a legal perspective other than
the terms of the operating agreement. A major financial transaction frequently requires the

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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rewriting and readopting of a new operating agreement, which all parties must sign.

When evaluating the ease of admitting a new investor, consideration must also be given to the
effect such a transaction has on existing investors. From a tax perspective, there can be many
different effects or none at all. From a manangement and control perspective, teaming with new
people involves decisions to be made:

Are the new investors merely financial investors, or will they become part operators of the
business?

If they are financial investors, such as private equity or venture firms, do they bring any
special skills unique to the industry, and how will they bring those skills to the company’s
operation?

Having new investors with their own votes and views obviously affects the level of control an
entrepreneur continues to have. These are all terms to be worked out, and many are as
important or more important to the company’s long-term success than the financial terms of the
deal. Think about it. Would you give up a 10 percent higher valuation of your business to
maintain a majority vote and control? What would you want the impact to be of missing a sales
growth goal by 10 percent? Would you want that to dilute your ability to run the business and
cause you to answer to others? These are the difficult nonfinancial questions an entrepreneur
faces when raising new money.

TAXES
Justice Oliver Wendell Holmes observed that “taxes are the price we pay for a civilized
society.” These words are carved into the granite above the doors to the headquarters of the
Internal Revenue Service in Washington, D.C. While this is no doubt a true statement, other
noted justices have made it abundantly clear that no taxpayer has any duty to pay more taxes
than legally required.

Legions of accountants and lawyers are available to help entrepreneurs fulfill their tax
obligations, but not to pay any more than is legally required. The choice of business form has a
significant impact on the tax obligations associated with starting, owning, operating, and
disposing of a business.

Tax choices and tax planning are complicated affairs. The tax law is constantly in a state of
flux due to activity in Congress, the Internal Revenue Service, the states, and the courts. There
are multiple tax jurisdictions—federal, state, and local. Different tax jurisdictions rely on
different tax structures to fund their budgetary needs.

For instance, personal income taxes are the main revenue source of the federal government,
while real estate taxes are the main revenue source for most school districts and
municipalities. Some states rely on sales and use taxes, while others rely on income taxes to
fund their budgets. However, while income taxes are the main source of federal revenue today,
there have been discussions in Congress about switching to a consumption-based tax.

Finally, tax legislation is not always written to answer tax issues; the tax code is often used to

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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promote or discourage behavior. When Congress feels it is important to promote retirement
savings, it does so by offering tax incentives for retirement accounts. When a state government
wants to attempt to influence smoking, it does so by imposing taxes on cigarettes. So
sometimes the reason a tax law exists is to address an issue other than raising revenue for the
government. These factors make thinking about taxes very complicated.

When evaluating tax considerations, there are two distinct tax events to focus on. There are the
ongoing taxes imposed on the profitable operation of the business (or the ability to deduct the
losses from unprofitable operation) as well as the “exit” or transactional taxes imposed on
some business events such as a sale or IPO. Frequently, the exit taxes are far more significant
than the annual operating taxes incurred during a business’s start-up phase.

The United States tax system operates on a system of double taxation of corporate profits, such
that the earnings of a corporation are taxed, and then the shareholders are taxed on dividends
received or gains on the sales of their investments. This double taxation is not as common in
other parts of the world economy, such as European countries. The reduced tax rates on
dividends and capital gains have started to reduce the impact of double taxation, but have not
eliminated the issue. A sole proprietorship offers a single level of tax, which is a far more
preferable situation. Other business forms, such as partnerships, LLCs, and S corporations,
also offer some or all of this single-level-of-taxation benefit.

Sole Proprietorships
A sole proprietor has the simplest tax structure. Income or loss from the business is reported
on a schedule attached to the 1040 individual tax return. This schedule is known as Schedule
C. Sole proprietors are required to pay self-employment tax on their business earnings. Self-
employment tax is the equivalent of Social Security and Medicare taxes paid by an employee
and the employer. A sole proprietor pays both shares of the tax as part of his or her annual
federal income tax liability by reporting self-employment income on Schedule SE of Form
1040.

A sole proprietor does not pay Social Security taxes on compensation paid to spouses or minor
children who work for the business. This technique can be used for planning purposes to
reduce self-employment taxes and can provide other benefits such as enabling spouses and
children to fund individual retirement accounts (IRAs) and the like. In addition, they pay no
unemployment tax for the owner, unlike other legal forms in which unemployment taxes are
paid for owner/employees.

Over the years, through various amendments of the tax law, Congress has attempted to level the
playing field between the tax effects of being an employee and being self-employed. The
biggest difference was always that a self-employed person was not able to deduct health
insurance costs unless they exceeded, with other medical expenses, a specified percentage of
adjusted gross income (currently 7.5 percent). Employees generally received health insurance
benefits as a tax-free perquisite from their employers, and if copayment of premiums was
required, the payment was usually 100 percent deductible by virtue of something known as a
cafeteria plan. Today, a self-employed person can fully deduct health insurance premiums

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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without regard to other medical expenses, and the deduction is available even to taxpayers
who don’t otherwise itemize their deductions.

Limited Liability Companies
Tax and legal reform during the 1990s created a new entity that offers the liability protection
benefits of a corporation combined with the flexibility and single-level-of-tax benefits offered
by sole proprietorships. A limited liability company, or LLC, is a corporation organized under
state law that can be treated in several different ways for tax purposes. As a corporation, it
provides its owners with full-scale protection against liabilities (subject to other rules, such as
the rules governing professional service corporations with regard to malpractice and
negligence claims). For tax purposes, the LLC can be treated as a “disregarded entity” if it has
only one owner. As a disregarded entity, the income and loss from an LLC’s operations are
reported similarly to sole proprietorship income, that is, on a Schedule C attached to Form
1040.

Multiple-owner LLCs operate under the terms of an operating agreement, which in many
respects is similar to a partnership agreement. The usual legal and other terms of partnership
agreements are discussed below. Typically, a multiple-owner LLC is treated for tax purposes
as a partnership, and the operating agreement typically has clauses relating to taxes that are
similar to those clauses that might be found concerning tax matters in a partnership agreement.

Either the single-member LLC or the multiple-owner LLC affords the ability to operate with a
single level of tax. Sales of membership interests, or the assets and business of the LLC, are
subject to only one level of tax on the owner. A purchaser of membership interest in an LLC
typically receives certain tax advantages concerning his investment such as the ability, if
appropriate, to have certain deductions allocated directly to him, and to obtain increased
depreciation or other deductions reflecting his investment in the enterprise.

The flexibility offered by the LLC structure means that many large corporations use LLCs
internally in their corporate structure for various planning purposes. This wide-scale use
means the LLC has been accepted universally as a bona fide form of business organization.
This can be seen in the labelling of food products. The tax transparency has created a situation
where many new entities are LLCs even in the largest public companies. The LLC offers an
opportunity to separate and insulate assets from liability without creating a cumbersome tax
structure. For this reason, LLCs have surpassed partnerships and S corporations as the most
popular form of business operation today.

Partnerships
Partnerships offer the pass-through benefits of a single level of taxation. For most tax impacts,
there are only subtle differences between operating as a partner versus being a sole proprietor.
The partnership, being a separate legal entity, files its own tax return, but it does not pay any
tax. Partners report their share of the profits on their individual tax returns.

For some ventures, the partnership structure is ideal. Limited partnerships have been the
structure of choice for real estate investors. The passive investors in the transaction can

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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receive the benefits of the depreciation and interest deductions associated with property
ownership. There are certain limitations on the ability to claim deductions against other
sources of income, but these limitations are consistent across all treatments and have to do
with participation in the business (active versus passive) and amount of investment the investor
has at risk. But the largest benefit of a partnership structure, either a limited partnership or a
general partnership, is the single level of taxation on a transactional event. These special rules
allow not only a single level of taxation to the seller, but also special tax treatment to the buyer
in terms of special tax allocations and the ability to recover some of their investment via
increased depreciation or amortization deductions. These benefits might be offset for some
investors; as previously mentioned, many venture funds that raise money from foreign investors
or tax-exempt investors such as pension funds have restrictions against investing directly in
partnerships that own active trades or businesses.

S Corporations
An S corporation is organized as a corporation for all legal purposes except taxation, assuming
it meets certain qualification criteria and makes an election to subject it to a special tax regime
for federal tax purposes and also in most, but not all, states. These rules are contained in
Subchapter S of the Internal Revenue Code; hence, these corporations are known as S
corporations. An S corporation has similar attributes to partnership structures, including LLCs.
But there are some differences concerning the ability to deduct losses in excess of direct
investment, the ability for new investors to receive favorable tax treatment, and a limitation on
the number and type of investors (constantly changing as Congress amends the tax law) that
make S corporations today a less popular choice than several years ago. S corporations also
have some inflexibility when compared to partnership structures in terms of offering different
investors differing shares of losses, profits, and the like.

C Corporations
Because the overwhelming majority (99.99 percent) of publicly traded companies are
corporations (there are a few limited partnership structures concentrated in a few industries)
most people think of corporations when they think of business. However, only a small
percentage of American businesses are formally incorporated and operate as regular tax-
paying corporations. It would be highly unusual for a start-up business to operate in this
fashion given the flexibility offered by other business forms.

Corporations are subject to double taxation. First, the profits earned by the corporation are
taxed; when these profits are distributed to a shareholder as a dividend, they are taxed again.
Gains on the sale of stock in a corporation are taxed to the seller, and the buyer does not get
any offsetting tax benefits.

Corporations offer some flexibility to arbitrage between individual and corporate tax rates.
The lowest corporate tax rate is much lower than the highest individual tax rate. Salaries paid
to owner/employees are deductible in computing income subject to corporate tax (subject to a
reasonable compensation limit). So a corporate structure might offer some short-term tax
savings due to the ability to reinvest some income in the business subject to a low tax rate. But

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
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double taxation always comes back to raise the combined tax to a rate higher than a simple
pass-through structure.

While many compensation vehicles, such as stock options, phantom stock, and other planning
items have been designed and are widely used by major corporations, they have been modified
in many ways to make them available to all business forms. Stock option plans for
corporations are comparable to some equity plans offered in a partnership context. While the
successful entrepreneur might end up with a corporate structure at the time of an IPO, there are
much more favorable structures to adopt while on that journey.

Corporations are taxed at a flat rate of 34 percent on all pretax income if it exceeds $335,000.
Therefore, once this level is exceeded, there is rarely a point at which an owner is better off,
tax-wise, as a regular corporation.

However, if the corporation’s pretax income is less than $50,000 and the owner does not
intend to pay much in the way of cash dividends, total taxes may be less than 31 percent by
doing business as a regular corporation.

Once the income level exceeds $50,000 and approaches $335,000, the benefit of lower
corporate tax rates is gradually eliminated. At $335,000 of pretax income the effective tax rate
on the corporation is 34 percent, compared with a 35 percent maximum individual tax rate. It is
at this point that the owner is usually better off electing to do business as an S corporation.

Table 3.1 summarizes the key characteristics of the alternative forms of legal organization.
These laws and tax rates are constantly changing, so determination of which form is best for
your business should be made in close consultation with legal and tax advisers.

TABLE 3.1 KEY CHARACTERISTICS OF ALTERNATIVE FORMS OF LEGAL
ORGANIZATION

SOLE
PROPRIETORSHIP

PARTNERSHIP PARTNERSHIP
LIMITED

LIMITED
LIABILITY
COMPANY
(LLC)

Corporation

Simplicity Simplest and least
expensive form to
establish and
maintain.

Relatively
simple to
establish and
maintain. A
written
partnership
agreement should
be drawn up at
the beginning.

More complex
than simple
partnership.
Needs a formal
written
agreement. Many
limited
partnership
interests are
marketable
securities and
must be

More complex
than simple
partnership
and limited
partnership;
needs formal
operating
agreement and
state
registration in
some states.

Generally
requires the
most
formality in
establishing
and
maintaining.

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
Created from capella on 2024-10-14 00:22:02.

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registered,
causing
additional time
and expense.

Liability Owner has unlimited
personal liability.

Each partner has
unlimited
personal
liability.

General partners
are personally
liable, while
limited partners
are only
financially liable
to the extent of
their investment.

Owners
(typically
called
members) are
not generally
liable. See
caveats under
Corporation.

Stockholders
are not
generally
liable. In
many small,
closely held
corporations,
the owner or
owners must
personally
cosign and
guarantee
loans.
Corporate
officers may
also be
liable for
payment of
withholding
taxes.

Federal tax
on profits

Owner taxed at
individual rate.

Each partner is
taxed at his or
her specific tax
rate.

Partners are
taxed at his or
her specific tax
rate.

Members
taxed at his or
her specific
tax rate.

Taxed to
corporation
at corporate
rates.

Deduction of
losses (for
investors
“materially
participating”
in the
business)

Yes. Yes.

In certain
circumstances.

In certain
circumstances.

No.
Corporations
carry over
(back)
losses, until
they offset
profits.

Double
taxation

No. No. No. No. Yes.

Ford, B. R., Bornstein, J. M., & Pruitt, P. T. (2007). The ernst and young business plan guide. John Wiley & Sons, Incorporated.
Created from capella on 2024-10-14 00:22:02.

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