Corporate Structures and the Benefits They Provide Essay

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Flow Entity Partnerships

For flow-through entities such as partnerships, how do the tax laws use partners' basis adjustments to prevent double taxation of partner income?

According to Rands (1996), there are several different avenues which are used to prevent double taxation for partnerships. The most notable include: S corporations, LLCs and limited partnerships. These areas enable for the flow through income depending upon the type and structure that is utilized (Rands, 1996).

An S corporation has the same benefits as a traditional corporation. This means that it is considered to be a separate legal entity under the law. However, what makes it different is the income that is received is passed through to each of the partners. They will report this as ordinary income on their individual tax returns. The company does not pay anything on the amount that it passes through to each partner. Under the law, this is considered to be flow through income. Once this takes place, is the point that each partner is liable for their percentage of the overall amount that is received (Rands, 1996).

Limited liability companies (i.e. LLCs) are set up with a maximum number of partners. They will report the earnings they receive on their tax returns as ordinary income.

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This is based upon the percentage that they own. This is considered to be a separate legal entity. However, the firm does not pay any taxes on the income that is received. Instead, the partners will pay this based on their cost basis. In this case, they pass on the losses and gains to avoid higher marginal rates. This flows through to the owner and allows them to avoid double taxation (Rands, 1996).

A limited partnership is when someone is investing in a corporation with the ability to share in the profits as a partner. However, they will not have day-to-day control of the operation. These responsibilities are passed onto the general partner. They will receive a percentage based upon their success in running the business. For a limited partner, they can take large write offs for any losses received. While at the same time, they can report their income as passive. This helps them to avoid double taxation, as the earnings or losses will flow through to them. In exchange, they risk the amount they have invested in the limited partnership (Rands, 1996).

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1. Each one of these entities allows….....

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