A Coggle Diagram about BUSINESS FORM, AGENCY LAW
An agency relationship arises (1) when a principal “manifests assent” to the agent that (2) “the agent shall act on the principal’s behalf and subject to the principal’s control,” and (3) “the agent manifests assent or otherwise consents to so act.” Restatement 1, Sub-K: pass-through taxation. The entity calculates its income/loss for the tax year and then allocates it to each owner.
Subject to self-employment tax on the business income + self-employment tax on any wages paid to them by the business.
:check: CAN ALLOCATE LOSSES, Sub-S: pass-through taxation. The entity calculates its income/loss for the tax year and then allocates it to each owner.
An entity can opt out in to Sub-S taxation only if meets the following eligibility requirements:
:check:It is a domestic entity, that is, it is incorporated in the US;
:check:It has 100 or fewer owners;
:check:All of its owners are individuals, estates, certain type of trusts, or tax-exempt organizations;
:check:None of its owners are nonresident aliens; and
:check:It has only one class of ownership interests outstanding.
*An entity must continually meet the above criteria, otherwise the tax classification will change to the default classification.
Subject to social security and medicare taxes (FICA) on wages paid by the business to its owners at a combined rate of 15.3%. Income retained by a a Sub-S business or distributed to owners as dividends is not subject to FICA tax. Thus, Sub-S taxation can substantially reduce employment taxes.
:red_cross:CANNOT ALLOCATE LOSSES, DOUBLE TAXATION - WORST
Sub-C : treated as a separate taxpayer. The entity must file an annual income tax return and pay any resulting income tax at corporate income tax rates.
Double- taxation: If a Sub-C entity distributes money to its owners (“dividend”), the owners must include the distribution in their taxable incomes. Thus, a Sub-C entity’s profits are taxed when earned and then taxed again (at a lower rate) when distributed to owners and Disregarded entity: the owner reports net income or net loss from the business on his personal federal income tax return.