Tax Treatment Considerations When Selecting Your Entity

David A. Zobel

By David A. Zobel

With contribution from Patrick J. Murphy

Part 3 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

With tax season upon us, we thought it particularly appropriate to outline the basics of how the entities outlined in Part Two are generally taxed on their profits and losses.

Limited Partnerships

Income, expenses, and losses of limited partnerships pass through the entity to the partners and are reported on their respective individual tax returns according to their proportionate interest in the partnership. The partnership pays no income tax itself, but is required to file an annual informational tax return.

Corporations

Corporations that have not made an election to be taxed under subchapter S of the Internal Revenue Code, on the other hand, do not have such “pass through” status and are required to pay their own taxes on profits. As such, they are required to file their own tax returns separately from their shareholders. Because of this additional layer of tax, shareholders end up being taxed twice on income – once initially on the corporation’s profit and then again when dividends are distributed.

Limited Liability Companies

Limited liability companies are not taxed themselves and profits and losses pass through to their members. Members report profits and losses on their individual returns in the same manner as the limited partnerships above. Although the limited liability company itself is not taxed, it is still required to file an informational return.

The information above is simple for a reason. It is not intended to act as a single source guide to assist in the preparation of your taxes, but rather general guideposts which may assist you in selecting the most appropriate type of entity for your business. Many factors, including specific elections made by the company, will affect tax payment and reporting obligations. You should contact your accountant or tax lawyer with specific questions about your business.

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn more about forming and operating your business through a legal entity, one of our experienced real estate attorneys would be happy to meet with you.

In the next post, we’ll move to considerations regarding your company’s governing documents. If you would like to go back and read our earlier posts, you can find links below.

Introduction
Part 1: Do I Need a Legal Entity?
Part 2: What Type of Legal Entities are Available?
Part 3: Tax Treatment Considerations When Selecting Your Entity
Part 4: Your Entity’s Governing Documents
Part 5: Operational Considerations – Purchasing Real Estate – Title Insurance
Part 6: Operational Considerations – Purchasing Real Estate – Indenture Review
Part 7: Operational Considerations – Purchasing Real Estate – Loan Documentation
Part 8: Operational Considerations – Corporate Formalities
Part 9: Insurance Considerations
Part 10: Drafting the Right Lease Agreement
Part 11: Litigation Considerations
Part 12: Should I Employ an Attorney to Assist my Real Estate Business?

 

Posted by Attorney David A. Zobel with contribution by Attorney Patrick J. Murphy, CPA. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues.  He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes. As both an attorney and a CPA, Murphy’s practice includes sophisticated estate planning approaches as well as corporate transactions and advice in mergers and acquisitions, buy/sell agreements, corporate structuring, and real estate transactions for small to medium-sized businesses.


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