Question

1. What are the different ways you can be compensated by a corporation, partnership, and sole proprietorship?  

2. How are the types of compensation different between each entity type?

3. What compensation types are similar across each entity type? Based on the types of compensation, what character and tax rate would those types of compensation fall under?

Answer 1

1. Different ways you can be compensated by a:

i) Corporation: Basic salary, Commissions, Bonuses, Medical benefits, Housing and other allowances.

ii) Partnership: Profits with respective to their share of capital, Fixed salaries based on the previous years' revenue, Incentives with respective to their fair contribution in the affairs of the firm.

iii) Sole proprietorship: This person can withdraw funds at any time for any need he wants with proper accounting. So whatever he takes as a compensation is called a 'DRAW'' not called by any compensational element.

2. How are the compensations different?

i) Basically shareholders hold the rights in the corporation rather an independent person or group of persons. So this kind of compensations will be diversified in the forms mentioned above.

ii) This is owned by group of people, say two or more people. They involve in this with risk sharing, based on the ratio of their capital structures.

iii) He must bare all of its debt and expenses independently. So he enjoys more of his benefits and equally suffers the losses.

So based on the above criteria, the compensation structure differs.

3. Similar compensations and tax rates of these types of entities.

The similar compensations are the basic pay and other incentives for these three kinds of entities. And what character and tax rates will these entities fall under are discussed below.

i) Corporation deduct the taxes to be paid on behalf of the employee as business expense and pay the rest to the employee as salary and other kinds of compensational elements. They have to file a separate business returns of tax through their respective forms.

ii) Partnership also have to file a separate business tax return through their respective forms. (1065 and K-1)

iii) He has a disadvantage of taxing as his own personal income thorough respective forms. (Schedule C or CE-Z)