Partnership vs. S-Corp
Submitted by Yesod on Thu, 2008-05-08 10:24.
So I read in another post that the difference between these two is that a s-corp requires a regular salary to be withdrawn, whereas with the partnership tax setup you simply withdraw funds as you wish, youre paying income tax regardless. My question is this: does money loaned to the partnership, either in startup or regular operation, need to be in the form of interest accruing notes? This is going both ways, money being loaned from Owner-Company and vice versa.
»
- Add new comment
- 442 reads
Partnership vs. S-Corp
Hi,
One major difference you've left out is that partnership net income is subject to Self Employment Tax, while S-Corp net income is not.
Money invested in the partnership can take the form of a loan
of a contribution of capital. A loan you expect to be repaid at a reasonable interest rate with a fixed term. Any interest paid must be reported as income by the partner. Or vice versa if that's the case.
A contribution increases the partner's basis in the partnership need not be paid back.
I hope this helps.
L:)
Ok, so a partner can make
Ok, so a partner can make contributions to the company and increase their basis without requiring all of the documentation that a loan would? When the basis is reduced through withdrawals is it simply reported on the 1065/1040?
Also (bear with me), If an s-corp has net income, but no dividends actually paid out, then these distrubutions are taxed at the shareholder's personal rate + self employment correct? And if the income is actually distributed then how does the whole double taxation thing apply? Is it personaly income rate first (on the 1040) and then 15% capital gains? Cause that would be about the same right? Or perhaps all net income needs to be reported on 1099-DIV unless applied to ones basis in the company...It getting more convoluted as i type (at least to me) so I'll just stop here.
Thanks.
Taxing S-Corp Shareholders vs.Partners
Sorry, but your understanding of the taxation of the different entity types is not correct. Let's see if we can't clear things up a bit. :)
For both S-Corps & partnership, all net income is taxed on owners' personal income tax returns (shareholder or partner). This is taxed regardless of distribution. The S Corp or partnership does not directly pay any taxes (except in very limited situations).
In addition to income tax, general partners must pay the 15.3% self-employment tax on the partner's share of the partnership's net taxable income. S Corp shareholders do not. Instead they must take a reasonable salary which subject to employment taxes (15.3% combined paid between employer & employee).
A partner can take a draw to distribute property from the partnership. These payments are not an expense of the partnership so not a deduction to the partnership or income to the partner. Rather they are distributions of previously taxed income. By that I mean those dollars were previously reported on the partner's individual income tax return as income from the partnership & the partner paid income tax on those monies.
Likewise, an S-Corp shareholder can take a distribution of the previously taxed income. These are not reported on 1099-DIV. Instead, these distributions are reported on the shareholder's K-1. Again, these distributions are not an expense to the S-Corp or income to the shareholder as they are basically previously taxed income.
The double taxation question only comes up for C Corps. The net income from the C-Corp never shows up on a shareholders individual tax return. Instead the C Corp pays income tax directly. Only when the C Corp pays a dividend does double taxation come into question. Like a distribution, these payments are not an expense of the corporation but they are income to the shareholder (because that shareholder has never directly paid personal income tax on those dollars in the past). When C Corp shareholders receive a dividend, they must report it as income & pay the dividend tax rate of 15% (on qualified dividends). So the corp has paid the income tax on the income & then the shareholder pays taxes on the dividend. If the dividend was an expense to the corp or not income to the shareholder there would be no double taxation. But that's not how it works.
Because an S-Corp normally doesn't pay dividends, but rather distributions, double taxation is not an issue for most S-Corps.
It may seem like for the most part, the entity types have the same tax rates. And they do. You can save taxes from one entity type over another by understanding what constitutes taxable income and what deductions you can take advantage of for each entity type. Most of the difference have to do with the fringe benefits that available to some entity types, but not others. :)
I hope this helps.
L:)
Thank you for the detailed information!
Linda,
Lots of good information in this post and others of yours that I've read. Thank you for taking the time to respond and describe so well!
Cheers,
C
That definetly helps. I
That definetly helps. I started second guessing myself when someone told me s-corp dividends go on 1099-DIV. Thanks for the help.