Various Forms of Organizations
Part I: Discuss the various forms of organization that are available to Penelope, Mark and John
The various forms of organization available to Penelope, Mark and John are:
GENERAL PARTNERSHIPS: A general partnership is a business organization formed when 2 or more individuals or entities form a business for profit. All partners share in the management and in the profits and decide on matters of ordinary business operations by majority of the partners or by percentage ownership of each partner. Each partner is liable for all business debts and bears responsibility for the actions of the other partners. Each partner reports partnership income on their individual tax return. A partnership dissolves on the death or …show more content…
Therefore, a contribution of property to an LLC will be tax free even if the contributor obtains only a relatively small interest in the LLC in exchange.
Part IV: Discuss, in detail, how this entity is taxed (if at all) and what filing requirements it has with the IRS
Limited liability companies that are subject to the partnership tax rules are not responsible for actually paying the tax on business earnings, but are responsible for preparing annual partnership tax returns on IRS Form 1065. This return is for informational purposes only; all income, deductions and credits are reported by each individual owner. The LLC reports each owner's share of these amounts on a Schedule K-1 at the end of the year. In this situation, if Penelope, Mark and John earn $120,000 and have $60,000 of deductible business expenses, then each of them will receive a Schedule K-1 with $40,000 of earnings and $20,000 of deductions. Each of them must then report these figures on their personal income tax returns. Essentially, the business will increase their personal taxable income by $20,000.
(LLC Tax Filing Rules -
Tax Basis in LLC Interest:
In general, the initial tax basis of a member who acquires an LLC interest from the LLC will be equal to the amount of money and the tax basis of any property that the member contributes to the LLC in exchange for such interest. The tax basis thus determined will be increased by such member's share of the LLC's liabilities, by its share of the LLC's