Corporations

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Mr. and Mrs. TP are in a very unique situation. They have four children ages 20, 22, 25, and 27, all of whom have no money management skills whatsoever. In order to keep their children with money in their pockets, the couple decides they want to transfer their investment portfolio of stock that they own to a new corporation in which the couple will own 20 shares of the voting stock and the four children will each own 100 shares of nonvoting stock apiece. The couple still plans to serve as the directors of the corporation as well as continue to manage the investment portfolio while the children receive the majority of the dividends annually. The couple can choose to run the corporation as an S Corporation, C Corporation, or a Limited Liability Corporation (LLC). We will explore the different tax consequences and burdens of operating as each type of corporation and determine which is most suitable for Mr. and Mrs. TP and family. S Corporation First, in an S corporation, the corporation in general will pay no tax, whereas the shareholders must include in gross income their proportionate share of corporate income whether or not the corporate earnings are distributed to them. The S corporation’s income will be computed under the same rules presently applicable to partnerships in which deductions generally allowable to individuals are allowed to S corporations. The key characteristic of S corporation status is the "flow-through" of profits and losses, income, capital gains, capital losses, and any other tax consequences to the shareholders of the corporation, in proportion to their ownership interests. The idea is that taxes are not paid at the corporate level, but only at the shareholder level. This "flow-through" characteristic avoids the double taxation of C corporations, where profits are taxed as income and capital gains of the corporation and then taxed again when distributed to shareholders. Another benefit of the flow-through characteristic of S corporation status is that business losses are passed through to shareholders. For shareholders of new startup companies, which anticipate losses, the S status allows the write off of corporate losses on personal tax returns. Often the losses can be used to offset other gains or income of the shareholders, reducing personal taxes to be paid. Provisions governing the computation of income that... ... middle of paper ... ...ng their income wisely and being able to distribute money to their parents. If the couple cuts the “adults” nonvoting shares of stock down to 50 per person this would cut their expected income in half and would really put the heat on their children in needing to learn how to manage money wisely. I also recommend that if the children don’t respond well to getting their stock cut in half, the couple should get the “adults” involved in the operating activities of the corporation so they know what its like to actually earn money instead of given to you on a silver platter. This could also be a step in the direction of the “adults” learning how to manage their money. The couple should use the extra income that was gained by cutting each “adults” nonvoting shares in half and pay for some money management and business classes for them. Bibliography 1) 2004 CCH Federal Taxation: Comprehensive Topics. CCH Incorporated, Chicago. 2003. 2) Hanson, Mary. www.bizadvisor.com. 1998. 3) www.corporateservicecenter.com. 2004 4) Annunzio, Dennis D. www.nevadacorporation.org. 1999.

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