S Corporations and Partnerships
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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 companies can be formed which offer almost all the advantages of an S corporation without its disadvantages. The taxation of S corporations and partnerships is similar, but there are some important differences. There are few significant differences in the federal taxation of qualified pension plans and pension benefits established by S corporations or partnerships. S corporations were first proposed to Congress by President Eisenhower in 1954 and became part of the Internal Revenue Code in 1958 as Sections 1361-1379. The code sections dealing with S corporations have been amended several times, most significantly by the Subchapter S Revision Ac
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tment of S corporations and partnerships which may make one form of organization or the other more attractive, depending on specific factual circumstances. McNulty summarizes those differences as follows:
The rules of Subchapter K offer a greater degree of flexibility to participants than do the Subchapter S rules, and eligibility for S status is much more restricted than is eligibility for partnership membership. On the other hand, the rules applicable to S corporations are much less ambiguous than their Subchapter K counterparts, offering a great degree of certainty to the participants in a venture.14
Some important areas of difference are as follows:
1. The 35 shareholder maximum can limit the S corporation's ability to raise equity capital.
2. The one class of stock rule has been a major topic of controversy. In his testimony before a House subcommittee in 1994, Robert Blair, the Chairman of the S Corporation-Reform Project, said that "because of these limitations, S corporations are unable to access capital from many types of lenders."15 Manning says that "participants in a venture who make capital contributions disproportionate to their share in profits may insist upon a fixed priority return on their investment .
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Some common words found in the essay are:
IRC Section, Corporations Partnerships, Corporation-Reform Project, Recent Developments, IRS Regulation, CORPORATIONS PARTNERSHIPS, Reform Act, Wasserman Cuff, Ownership Plan, Revenue Code, corporations partnerships, limited liability, federal taxation, liability companies, limited liability companies, taxation corporations, continuing education, continuing education bar, education bar, corporation partnership, matthew bender 1995, tax institute forty-seventh, federal income, internal revenue, usc tax institute,
Approximate Word count = 3638
Approximate Pages = 15 (250 words per page)
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