Question

A. Discuss the eligibility requirements and level of tax for each of the following entity types:

S Corporation

C Corporation

Partnership

Limited Liability Company

B. What is the control requirement of § 351? Describe the effect of the following in satisfying this requirement:

A shareholder renders only services to the corporation for stock.

A shareholder renders services and transfers property to the corporation for stock.

A shareholder has only momentary control after the transfer.

A long period of time elapses between the transfers of property by different shareholders.

Answer 1

Eligibility Requirement and Level of Tax for the following are as follows-

S Corpporation-

An "S-Corporation" is a regular corporation that has between 1 and 100 shareholders and that passes-through net income or losses to shareholders under in accordance with Internal Revenue Code

Eligibility Criteria for S-Corporations

Has not more than 75 shareholders,

Has shareholders who are all individuals (exceptions are made for various tax exempt organizations, estates, and trusts)

Has no nonresident aliens as shareholders, and

Has only one class of stock.

Level Of Taxation

There is no federal income tax levied at the corporate level. Instead, an S-corporation’s profit is allocated to its shareholder(s) and taxed at the shareholder level.

C Corporation

C Corporation refers to any corporation that is taxed separately from its owners. all for-profit corporations are automatically classified as a C corporation unless the corporation elects the option to treat the corporation as an S corporation. all for-profit corporations are automatically classified as a C corporation unless the corporation elects the option to treat the corporation as a flow-through entity known as an S corporation.

Eligibility Criteria for C-Corporations

A C corporation can consist of one person, anybody over the age of majority

Level Of Taxation

Profits are first taxed to the corporation

When Profit are distributed to shareholders in the form of dividends, they are taxed again; the corporation cannot deduct dividend distributions.

Partnership

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

Eligibility Criteria for Partnership

There should be atleast two persons to for a pratnership.

There must be a partnership agreement to form partnership.

Person entering into partnership must have atained majority and of sound mind.

Persons entering into partnership must not be disqualified from entering into contract.

Level Of Taxation

A partnership is not a separate tax entity from its owners. This means the partnership itself does not pay any income taxes on profits.

Business income simply passes through the business to the partners, who report their share of profits (or losses) on their individual income tax returns.

The partnership itself doesn't pay taxes, it must file IRS Form 1065, an informational return, each year

Limited Liability Company

Eligibility Criteria for Limited Liability Company

An LLC is formed by two or more members who have equal status; that is, there are no general partners

An organization structured as a corporation or partnership may become an LLC by distributing its assets to shareholders in place of their stock

Level Of Taxation

LLCs are never subject to entity-level Federal income taxes

LLCs are not taxed as a separate business entity

Instead, all profits and losses pass through the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership.

Section 351 allows a tax-free incorporation transfer if certain requirements are met, including that the property must be transferred to a corporation by one or more persons in exchange for stock in the corporation, and, immediately after the exchange, the transferor(s) is (are) in control (as defined in Sec. 368(c)) of the corporation

Also the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation

Effect of the following in satisfying this requirement:

A shareholder renders only services to the corporation for stock

The term property does not include services rendered or to be rendered to the issuing corporation. The value of stock received for services rendered by shareholder is income to the shareholder.

A shareholder renders services and transfers property to the corporation for stock

The term property does not include services rendered or to be rendered to the issuing corporation. The shareholder is treated as a member of the transferring group although taxed on the value of the stock received for servicesThe value of stock received for services rendered by shareholder is income to the shareholder.

However, if the the property transferred is 80% of the value of all outstanding stock immediately after exchange then it is a tax free exchange.

A shareholder has only momentary control after the transfer.

If a shareholder has only momentary control after the transfer, these shares do not count in determining control if the plan for ultimate sale or other disposition of the stock existed before the exchange.

A long period of time elapses between the transfers of property by different shareholders.

If a long period of time elapses between the transfers of property by different shareholders, the control requirement may be lost as to the later transfers because there is no transferring group

Note-

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