Question

1 )Why are S corporations and partnerships called flow-through entities?

2) Briefly compare a sole proprietorship to a corporation as a business entity.

3) Name and describe two types of taxes other than the income tax. Give an example of each.

Answer 1

1) S corporations and partnerships are called flow-through entities because they announce income on to the owners and/or investors of the business. Flow-through entities are a common device used to limit taxation by evading double taxation. Only the investors or owners are taxed on revenues, not the entity itself. The income generated by a flow-through entity is treated as returns of the investors or owners.

2) Unlike Corporations, sole proprietorships do not give limited personal liability for business debts. This means that creditors of those businesses can go after the owners' personal assets to obtain what's due. Corporations also differ from other business structures in the way they are taxed. The sole proprietorship is the manageable business form and is not a legal entity. ... In fact, a sole proprietor's assets can be and usually are used to settle the debts and liabilities of the business.

3) Two types of taxes other than the income tax.

a) Sales Tax: A tax levied by the government at the point of sale on retail goods and services. It is received by the retailer and passed on to the state. Sales tax is based on a portion of the selling prices of the goods and services and is set by the state. Technically, consumers pay sales taxes, but effectively, the business pays them since the tax increases customers costs and causes them to buy less.

b) Value-Added Tax: A national sales tax collected at every stage of production or consumption of a good. Depending on the political environment, the taxing authority often exempts certain necessary living items, such as food and medicine from the tax.