Question

short answer

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) Compare progressive, proportional, and regressive taxes.

4) Compare a sales tax to a use tax.

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

Answer 1

(1)- Most US businesses are not subject to the corporate income tax. Rather, profits flow through to owners and are taxed under the individual income tax. Flow-through businesses include sole proprietorships, partnerships, and S corporations.

S Corporations: Eligible domestic corporations that elect S-corporation status file a corporate tax return (Form 1120S), but profits flow through to shareholders and are reported on Schedule E of the shareholders personal income tax. S corporations cannot have more than 100 shareholders, and those shareholders must be US citizens or resident individuals (although certain estates, trusts, and tax-exempt organizations are also allowed). In addition, S corporations may have only one class of stock. S corporation owners do not pay SECA tax on their profits, but are required to pay themselves “reasonable compensation,” which is subject to the regular Social Security tax (i.e., the Federal Insurance Contributions Act or FICA).

Partnerships: Partnerships file an entity-level tax return (Form 1065), but profits are allocated to owners who report their share of net income on Schedule E of their individual tax returns. Under “check the box” regulations instituted by the Treasury Department in 1997, limited-liability companies (LLCs) can elect to be taxed as partnerships. General partners are subject to SECA tax on all their net income, while limited partners are only subject to SECA tax on “guaranteed payments” that represent compensation for labor services.

(2)- Corporations enjoy many advantages sole proprietorships, but there are also some disadvantages to consider.

-->> Advantages of a corporation versus a sole proprietorship:-

-->> Shareholders in a corporation are not liable for corporate debts

This is the most important attribute of a corporation. In a sole proprietorship or a partnership, the owners are personally responsible for business debts. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc. to make up the difference. On the other hand, if a corporation runs out of funds, its owners are usually not liable.

-->> Corporations have continuous life

Unlike a sole proprietorship or partnership, a corporation does not expire upon the death of its shareholders, directors or officers.

-->> Corporations make raising money easier

A corporation has many avenues to raise capital. It can sell shares of stock and create new types of stock, such as preferred stock, with different voting or profit characteristics. Plus, investors can rest assured knowing they are not personally liable for corporate debts.

-->>Corporations offer self-employment tax savings

Earnings from a sole proprietorship are subject to self-employment taxes, With a corporation, only salaries (and not profits) are subject to such taxes. This can save you thousands of dollars per year.

(3)- progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups.  

proportional tax—A tax that takes the same percentage of income from all income groups.

regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.

(4)- SALES TAX- The sales tax is imposed on retail transactions. It applies to all retail sales of tangible personal property, and in some states services, in the state.

USE TAX- The use tax is imposed on consumers of tangible personal property that is used, consumed, or stored in this state. Consumer’s use tax applies to purchases from out-of-state vendors that are not required to collect tax on their sales.

Sales and Use tax generally applies to most leases of tangible personal property. The sales tax and the use tax are “mutually exclusive”, which means either sales tax or use tax applies to a single transaction, but not both.

(5)- A business must pay a variety of taxes based on the company's physical location, ownership structure and nature of the business.

State and/or Local Income Tax: A tax levied by a state or local government on annual income. Not all states have implemented state level income taxes.

Payroll Tax: A tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the United States, both state and federal authorities collect some form of payroll tax. In the United States, Medicare and Social Security, also called FICA, make up the payroll tax.