Running Head: PARTNERSHIP VS.

CORPORATION 1







Week 9: Partnership vs. Corporation
Leah M. Pasternak
Dr. Jan D. Felton

Federal Taxation

June 4, 2014

Partnership vs. Corporation 2
Partnership vs. Corporation
Compare and contrast the advantages and disadvantages inherent in electing to become a
partnership and a corporation. Indicate key aspects in which the resulting choice is likely
to impact tax obligations.
To be or not to be, that is always the question. The decision on whether to elect on
becoming a partnership or a corporation is something that every company must decide on. There
are inherent advantages and disadvantages to each, and these are outlined below.
There are some differences in personal liabilities in a corporation and a partnership. In a
corporation, a shareholder may only be held liable for any amount that they may have invested in
the corporation (Quick MBA, 2010). In a partnership, a partner may be held liable for any and all
amounts invested by all parties. Within a partnership, management decisions are handled within
and by the partners, and within a corporation the management decisions are made by the board of
directors who are elected on by the shareholders. A partnership is not required by law to take
notes from their meetings, but a corporation is required to take notes, or meeting minutes (Quick
MBA, 2010). This creates an administrative cost for the corporation that the partnership typically
does not incur.
Of course, these differences between a partnership and a corporation also bring about also
bring about tax differences as well. Within a partnership, the taxes are divided equally amongst
the partners to pay the companys taxes. A corporation is a bit different. The income taxes are
paid by the corporation, and each shareholder within the corporation is required to pay taxes on
the dividends that they have received. This is topically called the double taxation effect. If a
company were to choose to be an S Corporation they would be considered a pass-through entity
Partnership vs. Corporation 3
and therefore are not required to pay corporate taxes. For this reason, the tax liability would be
less by choosing to be a partnership or an S Corporation.
Imagine that you are a Partner at Walk Upright Company. Justify to your team
why you elected to become a partnership in an effort to minimize tax liability. Prepare a
response to the objection that this election was the best choice.
Choosing a partnership for our company Walk Upright was one of the best decisions we
could have made. There are many reasons why Walk Upright Company is best handled under a
partnership than any other type of business. The ease of creating the company under a
partnership was a perk. We saved money on state filings as well as other administrative costs that
are needed when creating a corporation. We paid no state fees, no filing fees and no franchise
taxes (BizFilings, 2013). The only expenses we paid for were our business license and permits
required in order for us to operate our business. We have superior structural flexibility with our
company.
We also have very few ongoing requirements that we must follow now that we have
Walk Upright Company. We are not required to hold annual meetings, we do not need to keep
personal assets separate from business assets and we are not required to issue partnership interest
(Latham, 2013). Another perk to us having a partnership instead of a corporation is that we only
experience one level of taxation. We are never required to pay corporate taxes, and we do not
suffer from the double taxation that all corporations experience. Instead, we experience pass-
through taxation. That is, our company taxes our viewed as an extension of us, the owners for tax
purposes. We are also able to allocate the income and loss that Walk Upright Company
experiences, any way we see appropriate. We also have the ability to make ccontributions to and
distributions from a partnership without any income tax consequence whereas a corporation only
Partnership vs. Corporation 4
experiences tax free if the transferors are in control of the company after the exchange
(BizFilings, 2013). We also do not have to calculate or pay any estimated taxes, as corporations
do.
Imagine that you are the Chief Financial Officer (CFO) at No More Ice, Inc. Justify
to your management team why you elected to become a corporation.
Our company, No More Ice, Inc. has much greater benefits of being a corporation for
several different reasons. First of all, our total assets reach well over $2,000,000 and we have
many different taxation rules and regulations we must follow. We also own 85% of Voltage, Inc.
so being a corporation has lesser tax liabilities than if we were a limited liability company or a
partnership. Our total income also exceeds $1,000,000, so being a corporation is more beneficial
than not.
Even though we are subject to the double taxation rule, we still experience great
flexibility with our taxes. We are able to use income shifting in order to obtain lower tax
brackets. We are also able to offer corporate benefits such as retirement and medical. We also
experience no limits or restrictions on the amount of capital or the operating losses that No More
Ice may carry back or forward to subsequent tax years; something that a partnership is not able to
appreciate. For our corporation, only the salaries we pay and not our profits are subject to self-
employment taxes whereas companies such as a sole proprietorship experience these types of
taxes on their earnings as well. This saves us thousands of dollars per year.
Determine whether becoming a corporation was a wise choice as a potential strategy
to minimize tax liability as a result. Provide support for your rationale.
I believe that becoming a corporation was a wise choice to minimize tax liability. No
More Ice, Inc. was able to hold their loss on the stock of Leash Corp. as a short-term capital loss,
Partnership vs. Corporation 5
and is able to keep this for a three year carryback period. No More Ice, Inc. was also able to use
the Alternative Minimum Tax exemption of $40,000, which helped decrease their tax liability
greatly. No More Ice, Inc. was also able to take the dividends received deduction from the
companies it owned 20% or less in dividend income, such as AT&T Corp. and Dell Corp. No
More Ice was also able to minimize tax liability by taking 100% of the dividends received
deduction for Voltage, Inc. There are also benefits experienced because of the related
corporations rule and therefore are not taxed multiple times for multiple companies. There is
only one limit provided for each taxable income bracket.
Analyze the steps that the leadership in a partnership or a corporation must take in
order to change the entitys existing election. Provide examples of circumstance under
which changing the existing election would be appropriate. Indicate how this election
change, once complete, may either generate a tax liability or be a benefit. Provide support
for your rationale.
If your company is an LLC and would prefer to be classified as a corporation it must file
Form 2553, Entity Classification Election instead of Form 8832 (IRS, 2013). If the LLC elects to
be classified as a corporation by filing Form 8832, a copy of the LLC's Form 8832 must be
attached to the federal income tax return of each direct and indirect owner of the LLC for the tax
year of the owner that includes the date on which the election took effect (IRS, 2013). If the
company chooses to be classified as a corporation it must file a corporation tax return and pay
corporate taxes. Once the company changes its classification it must wait at least 60 months
before it can elect to change its classification again. If the company chooses to change its
classification from a partnership to a corporation, the company will be treated as if the
partnership contributed all of its assets and liabilities to the corporation in exchange for stock.
Partnership vs. Corporation 6
The partnership is then required to be immediately liquidated by distributing the stock to its
partners.





















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Resources

U. S. Internal Revenue Service. (2013).Limited Liability Companies (IRS Publication No. 3042).
Washington, DC: U.S. Government Printing Office.
Latham, A. (2013). The tax benefits of forming a general partnership. Small Business Chronicles,
Retrieved from http://smallbusiness.chron.com/tax-benefits-forming-general-partnership-
19353.html
BizFilings. (2013). Choosing the right type of business partnership [Online forum comment].
Retrieved from http://www.bizfilings.com/learn/form-partnership.aspx
Quick MBA. (2010). [Web log message]. Retrieved from
http://www.quickmba.com/law/partnership/general/