SUBCHAPTER S CORPS. & PARTNERSHIPS.
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Definies businesses & compares purposes, formation, federal income tax issues, pension plans & benefits, shareholder liability.... More...
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Paper Abstract:
Definies businesses & compares purposes, formation, federal income tax issues, pension plans & benefits, shareholder liability.
Paper Introduction:
S CORPORATIONS AND PARTNERSHIPS
This research paper describes the essential similarities and differences between a Subchapter S corporation (an "S corporation") and a partnership with the emphasis on the difference in their treatment for federal income tax purposes. It also includes a discussion of the tax treatment of pension plans and pension benefits. The principal advantage of an S corporation over a partnership is that shareholders of-an S corporation can obtain limited liability and the flow-through tax advantages of a partnership. An S corporation is, however, not the only way owners can obtain those goals. To some degree, a limited partnership can achieve them. Professional corporations can be formed by the owners of certain types of professional firms such as attorneys. And, since 1990, limited liability
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income tax purposes It also includes a discussion of a partnership An S corporation is such as attorneys And since limited liability similar but there are some PresidentEisenhower in and became part of the Internal Revenue Code Act of Various proposed revisions in the code were variations their versions of theUniform necessity of taking into account formed under the laws of some state Bravenec taxedas a C corporation Qualification as an S Stat Ann Section and some others Cal Rev and Tax Code Section Separate of the corporation'scurrent taxable year or if it S corporation the following requirements must not available to an Scorporation because the be non-resident aliens The corporation must have only the same rightsto distributions and in liquidation Once S status orterminated S status can not be including corporations and aliens can be person contributing money property labor or skill and by the IRS as an th Cir Different Features of S a general partnership allpartners are held jointly and be required by its creditorsto guarantee personally the debts of theory that he is the alter ego he refrains from participating in the like any corporation has perpetual existence dissolution of alimited partnership Every corporation has centralized a partnership for tax purposes a this test the partnership will be taxed asthough it were a common feature namelythat the income income tax iscurrently less than the maximum items of corporate income loss deductions and credits are of partnerships under Subchapter K is K each partner reports only his share of thenet income federal tax treatmentof S corporations and partnerships which may than do the Subchapter S rules ambiguous than their Subchapter K counterparts offering a great degree The one class of stock rule capital from manytypes of lenders Manning says that Avoiding taxation on the movement from a accordance with a shareholder'sequity interest Manning says that afford differ fromcurrent distributions McNulty says that the inability to makepartnership-type among various partners or classes of Tax Reform Act of to withoutrecognition of gain at the entity level under tax benefit of the losses can be Anotherdifference is that entity-level borrowing the basis of a shareholder inan S corporation Death and obtain a stepped-up basis to currentfair madewith minimal adverse tax effects in a partnership He says favorably than partnerships When services orproperty are transferred to a or sold they can take advantage of the tax-free reorganization involved ininternational transactions They find the restriction on nonresidentaliens holding more than percent of the stock transactionsinvolving partnerships which previously were ignored The Final under those proposed regulations unless its economicagreement and clearly reflect their income Since S corporations and partnerships have been treated in plans the benefits available toS corporations are essentially identical until distributions are made and thedistributions loans from a qualified plan to ashareholder-employee based on the general partner'sshare of business income taxable as income to any employee who owns percent or unlike a partnership an S corporation cannot structurepayments to a removed the restriction on alien ownership permitted S corporations to and operational structure one reason that Congress may not be in the laws of more than states including status basis distributions built-in-gains and passiveincome LLCs are not to the gains inherent in their assets Conclusion situation At present new S Practising Law Institute Bravenec Lipon Richard The Single-Class of Stock Continuing Education of the Bar January February Mesler v Bragg House of Representatives One Hundred Third Congress Second Session Foundation Press Reform Proposals supra Elliott Manning Roche Jr Robert R Keatinge and Barbara C Spudis Regulations-AntiabuseRegulations Or Simply Abusive Regulations In S Wiley Start Your Subchapter S' Corporation New Corporations CurrentIssues and Planning Opportunities In USC Tax Institute Taxation of Pass-Through Entities Part I S Corporations Program Handbook David G Bahls S Corporations and Life Insurance Chicago American Stock Regulations Journal of Taxation November Manning Elliott Handbook Berkeley Continuing Education of the Bar McNulty John K Pass-Through Benefits Without S Corp Restrictions Journal of on Federal Taxation New York Matthew Bender to Cuff IRS Attempts to Demonize' the Your Own Subchapter S Corporation New York John corporation an S corporation and apartnership with the emphasis partnership is that shareholders of-an a limited partnershipcan achieve them Professional corporations can be formed S corporation without its disadvantages by Scorporations or partnerships Background S corporations were by the Subchapter S RevisionAct law for centuries and are governed by the laws of was enacted to allow the owners of closely heldbusinesses no legal standing as such The under IRC Section Any corporation which doesnot qualify as all but seven states One state S corporations is subject to an be filed under IRC Section a business or acquires assets All shareholders must consent to the not an estate ortrust An as ashareholder it may be a partner in which is convertible into equity Votingrights can be staggered more than percent of the shareholders oris otherwise can be formed by a simple agreement the relationship existing between two or more persons who of all the partners Wheeler v Comr T C Memo the power to terminate the shareholder'sliabilities are limited to the amount of his investment partnership may however become blurred for severalreasons to pierce the corporateveil or hold his liability to the amount partner who is liable for be avoided by agreement among the partners Death orwithdrawal of freely transferable whereas partnership interests are not but in continuity of life centralization ofmanagement limited liability and free governed by Subchapter S of the that the ability to avoid the incidenceof double of era Hesays that S corporations are a partnership Forty percent of allcorporations in business including investment activitiesthrough a sources and each partner then pays tax on summarizes those differences as follows The rules of Subchapter K for partnership membership On the other hand The shareholder maximum can limit the Corporation-Reform Project said that becauseof these fixed priority return on their investment priority is stuck Under Section a distributions of profits profits may be allocated in adifferent ratio a partnershipagreement can rather flexibly corporations-is more difficult than withinpartnerships This involves some highly free of tax In general to Scorporations and partnerships McNulty says the taxes on owners willgenerally be size of any loss or decreasing anytaxable S corporation Bravenec says that a recipient be impossible Manning saysthat distributions dollars In tax-free reorganizations and Scorporations but not to partnerships that the transferor must control recognize gain or loss on such of S corporation status Finally S corporations are on pp to of Bravenec's text is on abusive partnershiptransactions A partnership purpose theform of the transaction must pass muster under a the expandedliabilities of professionals to IRC Sections Klein and Bahls saythat in aredeductible against the entity's income there is no rule applies to s corporations IRC the planis disqualified In S life insurance and meals and lodging provided by the same as in a Ccorporation payments becoming Developments The proposals to Congress that if these proposalswere adopted S corporations benefits of limited liability andflow-through tax advantages to thecumbersome and often confusing rules relating those corporations tried to convertthem into limited liability respect to S corporations and partnerships each of which Rep No th Cong d Sess Lorence L Bravenec Federal In ContinuingEducation of the Bar Taxation of Pass-Through Entities Part Before the Subcommittee on Procurement Taxation Manolakas John K McNulty Federal Income Taxation Commerce Clearing House Manning McNulty McNulty McNulty and Bravenec April William P Wasserman and Terence F Cuff IRS Attempts Lablis Seeing Shelter Partnership Structure Is Calledin Question American Bar Association McNulty Schaaf Corporations nd Ed New York Practising Law Institute and Subchapter K and Regulations thereunder Street Journal June Al Lipon of S Corporations In Continuing Education of the Bar Cal Rptr Roche Edward J Jr Robert R Keatinge Current Issues and Planning Opportunities In Tax Institute Forty-Seventh Annual Institute on Federal Taxation New York Taxation New York Matthew Bender S CORPORATIONS AND PARTNERSHIPS This research paper describes the essential of the taxtreatment of pension plans and pension benefits however not the onlyway owners can companies can be formed which importantdifferences There are few significant differences in the in asSections The code sections presented to Congress in but they have not been Partnership Act and the Uniform Limited Partnership Act major differences in taxconsequences An S says that Subchapter S applies only to a small corporation for federal incometax purposes qualifies a corporation for similar including California impose small income taxes elections must be filed in most states For federal income is newly formed the earliest of bemet The corporation must not have more than shareholders All stock in an ESOP is owned by a trust one class of stock It is elected it remains in re-elected for five years except a partner No government filings each expecting to share in the profits andlosses of the employment relationship-and lose its flow-through tax Corporations and Partnerships In an S corporation just severally liable for the debts andobligations of the the corporation A court may decideto prevent fraud ofthe corporation A limited partner in a actual control of the partnership andprovided that there Apartnership will be terminated on the management and control In fact many partnership mustunder Revenue Ruling and Regulation a C corporation Federal Tax Treatment of S of the business is taxed once to the corporate rate has led to the increasedpopularity of S passed through to the shareholders in a mannersimilar similarly motivated IRSRegulation a states of the partnership This amount is make one form of organizationor the other and eligibility for S status is of certainty to the participants in a venture Some has been a major topic ofcontroversy In his testimony before participants in a venture who makecapital contributions disproportionate corporation to apartnership is much easier significant flexibility in partnerships afford significant special allocations may make the S corporation far partners includingdepreciation Avoiding taxation on block C corporations frommaking S IRC Section except forcertain hot assets' such as higher in an S corporation than in apartnership but in a partnership adds to buy-out arrangements can be more flexible market value without incurring a tax at the partnership that apartnership presents the best opportunity partnership there generally is no tax but under Section sections of the IRC which are available ownership a handicap Various disqualifying transactions of another corporation For a more complete treatment Section Regulations were issued in early which Wasserman transactions meetthe following criteria all transactions must be entered into Partners have become moreinterested in finding ways to limit their thesame manner as C corporations with respect to pension or to those available to C corporateshareholders The are taxable to owners when they are paid out in who owns more than percent of the stock If acorporation whether distributed or not Fringe benefits such more of the stock Non-qualified unfunded deferredcompensation plans in retiring shareholder or the estate of own more than percent of another corporationand allowed two in any hurry to act is that mostnew California and are more attractive than either S corporations orpartnerships of-much use however to most The foregoing summarizes the state of the corporations areless in vogue than the new limited liability Regulations Journalof Taxation November Internal Revenue Service Publication December Management Co Cal d P d Cal Rptr Manolakas Ibid Serial No Washington D C June Washington DC U Choosing the Business Entity C Limited Liability Companies Offer Pass-Through Benefits Without USC Tax Institute Forty-Seventh Annual York John Wiley Sons William D Klein and Forty-SeventhAnnual Institute on Federal Taxation New York Matthew Bender Roche Berkeley Continuing Education of the Bar Bar Association Lablis Bertrand Seeing Shelter Partnership Structure Choosing the Business Entity C C H Tax Trans Federal Income Taxation of S Corporations Westbury Connecticut Foundation Press Taxation April Schaaf Donald A and United States Senate Senate Rep Partnership The Final Section Regulations-Antiabuse Regulations Or Simply Abusive Wiley Sons on the difference in their treatment forfederal Scorporation can obtain limited liability and the flow-through taxadvantages by the owners ofcertain types of professional firms The taxation ofS corporations and partnerships is first proposed to Congress by of Pub L No and by the Tax Reform the states which have passed with some to select the form of business organization desired withoutthe first requirement is that acorporation be an S corporation or which loses that qualification is Louisiana does not recognize Scorporations LA Rev annual percenttax at the corporate level under on or before the th day of the third month election To qualify as a ESOP Employee Stock Ownership Plan is a partnership None of the shareholders can or varied but all shares must have terminated by a disqualifying event Once revoked among the partners Any natural person join togetherto carry on a trade or business with each A partnership can be recast arrangement and keep thebusiness Pounds v United States F d In a generalpartnership all partners investment In A shareholder of a corporation may a shareholder liable on the of his investment but only if theobligations of the partnership An S corporation any general partner however causes the fact shareholder agreements in corporations often restricttransferability To qualify as transferability of partnershipinterests If it fails to meet Internal RevenueCode and partnerships by Subchapter K They share taxation coupled with the fact that the maximum treated the items of corporate income aspass-through entities the the United States million are S corporations Thetreatment flexible economic arrangement without incurring an entity leveltax Under Subchapter his net income There are however certain differences in the offer a greater degree of flexibility to participants the rules applicable to S corporations are much less S corporation's abilityto raise equity capital limitations S corporations are unable to access returns aremore difficult to arrange in S corporations or losses froman S corporation must be made strictly in than losses or liquidating distributions may allocate income losses and futureappreciation technical rules which weredeveloped under the partnerships can distribute appreciated assets in kind that in some circumstances the lower in partnerships than S corporations gain but such debt does not increase of afinal payout from a partnership can upon death retirement or other withdrawal may be acquisitions S corporationsgenerally are treated more percent of the stock When S corporations are merged acquired transactions An increasing number of S corporations are becoming subject to a special rule that theymay not own useful Recently the IRS has been cracking down on many will not be eligible to be taxed as apartnership substance over formprinciple and they must accurately reflect the partners' third parties for negligence andmalpractice Pension Plans and Benefits the case of qualified retirement tax on the earnings ofthe assets in the pension fund Section c B d prohibits any corporations contributions are based on employeecompensation in partnerships they are an Scorporation to an employee are deductible only when benefits are paid McNulty says that would have raised the minimumnumber of shareholders to will obtain significant additionalflexibility in their capital are limited liability companies These newentities have been provided for to the election of Scorporation companies they would trigger a very large taxattributable serves validpurposes in the appropriate Taxation of S Corporations andShareholders nd Ed New York I SCorporations Program Handbook Berkeley and Tourism of the Committee onSmall Business of S Corporations Westbury CT McNulty McNulty Bravenec Manning Manning McNulty McNulty Edward J to'Demonize' the Partnership The Final Section as Liability Risk Rises Wall Street Journal June Al Arnold Donald A and Richard A Spitz S Continuing Education of the Bar Internal Revenue Service Publication December Klein William D and Richard W The Single Class of Taxation of Pass-Through Entities Part I S Corporations Program and Barbara C Spudis Limited Liability Companies offer USC Tax Institute Forty-Seventh Anniial Institute Matthew Bender Wasserman William P and Terence F to Wiley Arnold S Start similarities anddifferences between a Subchapter S The principal advantageof an S corporation over a obtain those goals To some degree offer almost all theadvantages of an federal taxationof qualified pension plans and pension benefits established dealing with S corporations havebeen amended several times most significantly enacted into law Partnerships have been partof the common Purpose Definition and Formation Subchapter S corporation is a creation of the Internal RevenueCode and has business corporation' that files aproposed election tax treatment at the statelevel in on the corporate entity In California income of taxpurposes the Subchapter S election must the datesthe corporation has shareholders starts in shareholders must be individual persons and Bravenecsays that although an S corporation cannot have a partnership may have straight debt but not debt effect unless it is voluntaryrevoked with the consent of with theconsent of the IRS Partnerships are necessary The IRS definition of a partnershipis business The key feature of a partnership is theproprietary interest benefits if one partner usually the providerof capital has like any other corporation a partnership This distinction between an Scorporation and a or for other public policy reasons limited partnership is also ableto limit is at least one general death withdrawal or bankruptcy of apartner but this can partnership agreements so provide And finally corporate shareownership is lack at least two ofthe following four characteristics Corporations and Partnerships S corporations are owner thus avoidingdouble taxation Manolakas says corporations in the post-Tax Reform Act to that of partners in that subchapter K is intended to permittaxpayers to conduct joint combined with his incomefrom other more attractive depending on specific factual circumstances McNulty much more restricted than is eligibility important areas of difference are as follows a House subcommittee in RobertBlair the Chairman of the S to their share in profits may insistupon a than vice versa Anyone who selects thepartnership form by mistake flexibility in establishingfinancial relationships For example lesssuitable for real estate investments He says that the distribution of assets which haveappreciated in value in s elections and then distributing appreciated property receivables Different rules relating to the pass-through of losses apply when gains are involved he says the taxbasis of a partner thus increasing the in thepartnership than in the level butaccomplishing this in an s corporation may to pay a retiring or withdrawingpartners with pre-tax of the IRC there is a special rule applicable to only to corporations and their shareholders Generally partnerships must applicable only to Scorporations can result in a loss of this subject the chart and Cuff call amajor frontal assault by the Treasury by a bona fide partnership and for a substantial business liabilities through professionalcorporations or limited liability companies because of retirement planswhich are qualified under same is true for partnerships The contributions a lump sum orover time one special makes an S election while such a loan is outstanding as premiums paid for medical and disabilityplans and for group an S corporation are treated a deceased shareholderso as to make them deductible Recent classes of stock Schaaf said companies being formed to gain the for many investors because the LLC is not subject current Scorporations because if the owners of tax law as it exists todaywith companies Endnotes United States Senate S Thomas G Manolakas Taxation of S Corporations Ibid See Reform Proposals for Subchapter S Corporations Hearing S Government Printing Office IRS Regulation a C H Tax Trans Lib Chicago S Corp Restrictions Journal of Taxation Institute on Federal Taxation New York Matthew Bender Wasserman Bertrand David S Bahls S Corporations and LifeInsurance Chicago BibliographyBravenect Lorence L Federal Taxation of S January February Internal Revenue Code Sections and Regulations thereunder Is Called in Question as Liability Risk Rises Wall Lib Chicago Commerce Clearing House Manolakas Thomas G Taxation Mesler V Bragg Management Co Cal d P d Richard A Spitz S Corporations No th Cong d Sess USC Regulations In USC Tax Institute Forty-Seventh Annual Institute on Federal income tax purposes It also includes a discussion of a partnership An S corporation is such as attorneys And since limited liability similar but there are some PresidentEisenhower in and became part of the Internal Revenue Code Act of Various proposed revisions in the code were variations their versions of theUniform necessity of taking into account formed under the laws of some state Bravenec taxedas a C corporation Qualification as an S Stat Ann Section and some others Cal Rev and Tax Code Section Separate of the corporation'scurrent taxable year or if it S corporation the following requirements must not available to an Scorporation because the be non-resident aliens The corporation must have only the same rightsto distributions and in liquidation Once S status orterminated S status can not be including corporations and aliens can be person contributing money property labor or skill and by the IRS as an th Cir Different Features of S a general partnership allpartners are held jointly and be required by its creditorsto guarantee personally the debts of theory that he is the alter ego he refrains from participating in the like any corporation has perpetual existence dissolution of alimited partnership Every corporation has centralized a partnership for tax purposes a this test the partnership will be taxed asthough it were a common feature namelythat the income income tax iscurrently less than the maximum items of corporate income loss deductions and credits are of partnerships under Subchapter K is K each partner reports only his share of thenet income federal tax treatmentof S corporations and partnerships which may than do the Subchapter S rules ambiguous than their Subchapter K counterparts offering a great degree The one class of stock rule capital from manytypes of lenders Manning says that Avoiding taxation on the movement from a accordance with a shareholder'sequity interest Manning says that afford differ fromcurrent distributions McNulty says that the inability to makepartnership-type among various partners or classes of Tax Reform Act of to withoutrecognition of gain at the entity level under tax benefit of the losses can be Anotherdifference is that entity-level borrowing the basis of a shareholder inan S corporation Death and obtain a stepped-up basis to currentfair madewith minimal adverse tax effects in a partnership He says favorably than partnerships When services orproperty are transferred to a or sold they can take advantage of the tax-free reorganization involved ininternational transactions They find the restriction on nonresidentaliens holding more than percent of the stock transactionsinvolving partnerships which previously were ignored The Final under those proposed regulations unless its economicagreement and clearly reflect their income Since S corporations and partnerships have been treated in plans the benefits available toS corporations are essentially identical until distributions are made and thedistributions loans from a qualified plan to ashareholder-employee based on the general partner'sshare of business income taxable as income to any employee who owns percent or unlike a partnership an S corporation cannot structurepayments to a removed the restriction on alien ownership permitted S corporations to and operational structure one reason that Congress may not be in the laws of more than states including status basis distributions built-in-gains and passiveincome LLCs are not to the gains inherent in their assets Conclusion situation At present new S Practising Law Institute Bravenec Lipon Richard The Single-Class of Stock Continuing Education of the Bar January February Mesler v Bragg House of Representatives One Hundred Third Congress Second Session Foundation Press Reform Proposals supra Elliott Manning Roche Jr Robert R Keatinge and Barbara C Spudis Regulations-AntiabuseRegulations Or Simply Abusive Regulations In S Wiley Start Your Subchapter S' Corporation New Corporations CurrentIssues and Planning Opportunities In USC Tax Institute Taxation of Pass-Through Entities Part I S Corporations Program Handbook David G Bahls S Corporations and Life Insurance Chicago American Stock Regulations Journal of Taxation November Manning Elliott Handbook Berkeley Continuing Education of the Bar McNulty John K Pass-Through Benefits Without S Corp Restrictions Journal of on Federal Taxation New York Matthew Bender to Cuff IRS Attempts to Demonize' the Your Own Subchapter S Corporation New York John corporation an S corporation and apartnership with the emphasis partnership is that shareholders of-an a limited partnershipcan achieve them Professional corporations can be formed S corporation without its disadvantages by Scorporations or partnerships Background S corporations were by the Subchapter S RevisionAct law for centuries and are governed by the laws of was enacted to allow the owners of closely heldbusinesses no legal standing as such The under IRC Section Any corporation which doesnot qualify as all but seven states One state S corporations is subject to an be filed under IRC Section a business or acquires assets All shareholders must consent to the not an estate ortrust An as ashareholder it may be a partner in which is convertible into equity Votingrights can be staggered more than percent of the shareholders oris otherwise can be formed by a simple agreement the relationship existing between two or more persons who of all the partners Wheeler v Comr T C Memo the power to terminate the shareholder'sliabilities are limited to the amount of his investment partnership may however become blurred for severalreasons to pierce the corporateveil or hold his liability to the amount partner who is liable for be avoided by agreement among the partners Death orwithdrawal of freely transferable whereas partnership interests are not but in continuity of life centralization ofmanagement limited liability and free governed by Subchapter S of the that the ability to avoid the incidenceof double of era Hesays that S corporations are a partnership Forty percent of allcorporations in business including investment activitiesthrough a sources and each partner then pays tax on summarizes those differences as follows The rules of Subchapter K for partnership membership On the other hand The shareholder maximum can limit the Corporation-Reform Project said that becauseof these fixed priority return on their investment priority is stuck Under Section a distributions of profits profits may be allocated in adifferent ratio a partnershipagreement can rather flexibly corporations-is more difficult than withinpartnerships This involves some highly free of tax In general to Scorporations and partnerships McNulty says the taxes on owners willgenerally be size of any loss or decreasing anytaxable S corporation Bravenec says that a recipient be impossible Manning saysthat distributions dollars In tax-free reorganizations and Scorporations but not to partnerships that the transferor must control recognize gain or loss on such of S corporation status Finally S corporations are on pp to of Bravenec's text is on abusive partnershiptransactions A partnership purpose theform of the transaction must pass muster under a the expandedliabilities of professionals to IRC Sections Klein and Bahls saythat in aredeductible against the entity's income there is no rule applies to s corporations IRC the planis disqualified In S life insurance and meals and lodging provided by the same as in a Ccorporation payments becoming Developments The proposals to Congress that if these proposalswere adopted S corporations benefits of limited liability andflow-through tax advantages to thecumbersome and often confusing rules relating those corporations tried to convertthem into limited liability respect to S corporations and partnerships each of which Rep No th Cong d Sess Lorence L Bravenec Federal In ContinuingEducation of the Bar Taxation of Pass-Through Entities Part Before the Subcommittee on Procurement Taxation Manolakas John K McNulty Federal Income Taxation Commerce Clearing House Manning McNulty McNulty McNulty and Bravenec April William P Wasserman and Terence F Cuff IRS Attempts Lablis Seeing Shelter Partnership Structure Is Calledin Question American Bar Association McNulty Schaaf Corporations nd Ed New York Practising Law Institute and Subchapter K and Regulations thereunder Street Journal June Al Lipon of S Corporations In Continuing Education of the Bar Cal Rptr Roche Edward J Jr Robert R Keatinge Current Issues and Planning Opportunities In Tax Institute Forty-Seventh Annual Institute on Federal Taxation New York Taxation New York Matthew Bender
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