Partnership Vs Corporation Case Study

Running Heading: Partnership vs. Corporation

Partnership vs. Corporation

By:

Thomas Andrews

Prof. Ronald Keele

ACC317: Advanced Federal Taxation

February 20, 2018

The goal of this paper is to analyze the applicable tax rules and treatment governing partnership and corporation. Additionally, determine the level of impact these rules and treatment have on shareholders or partners’ interest. Conversely, evaluate the reasonings for organizations selection of partnership over corporation (and vice versa), as well as factors that influence the decision making in selecting the business entity to operate. Finally, recommend the business structure that will enhance the shareholder interest void of personal liability.

1. Compare

Cognizant of both partnership and corporation being an effective mechanism to operate a business, the decision of which LLC to select is predicated on which one produces the most favorable tax treatment in the interest of the partners or shareholders. There are several favorable tax factors that entice business owners to the partnership over C-corporation; namely: entity-level taxation, pass-through taxation, overall accounting method, self-employment tax to name a few.

Of the few favorable factors enumerated, entity-level taxation and pass-through taxation would encourage business owners to opt for partnership. For an entity-level taxation, the partnership submits an annual report (on Form 1065) of its revenue and expenses to the IRS; but does not pay taxes as a business entity. According to Spilker et al (2017), persons carrying on business as partners shall be liable for income tax only in their separate or individual capacities; thus, this feature of partnership taxation largely explains the popularity of partnerships over corporations (p. 250). In view of this, partners are issued IRS Schedule K-1 of the business Form 1065 (to be filed with the IRS). Schedule K-1 contains partner’s profits and loss portion of the business

Imagine that you are a consultant and make the recommendation that the most advantageous business structure is a C-corporation. Justify why you would recommend a Corporation over a Partnership. Indicate tax rules that influenced your decision.

Corporations have numerous advantages over partnerships, and it’s one of the oldest form of business organization. Few of these benefits corporations have over partnerships are limited liability, perpetual existence, shareholders ability to sue & be sued, and ease of transferability. In the case of limited liability, the shareholders and employees of C-corporations are not liable for business liabilities and obligations.

Another benefit C-corporation has over partnership is perpetual existence. Partnerships continual existence is tied to the partners; contrary to C-corporations, their owners are independent of the business. That is, corporation existence is indefinite, irrespective of shareholders’ death or departure from the entity. The Tax rule governing C-corporation is reflected in IRS Form 8832 (www.irs.gov). Based on the above-enumerated benefits of C-corporation over partners; C-corporations would be the appropriate choice of recommendation from