Taxation for Decision Makers, 2012 Edition

chapter 10

Sole Proprietorships and Flow-Through Entities

CHAPTER OUTLINE

Setting the Stage—An Introductory Case

Introduction to Flow-Through Business Entities

The Sole Proprietorship

Partnerships

S Corporation Characteristics

The U.S. Production Activities Deduction

Comparison of Total Tax Burden by Entity

Expanded Topics—The Passive Deduction Limitations

Revisiting the Introductory Case

Summary

Key Terms

Test Yourself

Problem Assignments

Answers to Test Yourself

This chapter examines the operations of sole proprietorships, partnerships, and S corporations. Each of these entities has advantages and disadvantages, and the taxpayer must sort through these issues to determine which entity best meets the taxpayer's needs.

Although each of these entities passes its income through to the owners for taxation rather than being taxed directly, significant differences exist. The owners' liability exposure, their ability to deduct losses that the entity passes through, and the tax treatment should the entity dissolve all differ for these entities.

Variations of the partnership form include general partnerships, limited partnerships, professional limited partnerships, limited liability companies, and professional limited liability companies. Each has its own advantages and disadvantages.

Certain corporations meeting specific corporate and shareholder restrictions can elect S corporation status. S corporations pass their income through to their shareholders for taxation similar to partnerships. ...