Select Page

Business Planning
Wayne State University Law School
Schenk, Alan

a. Generally
i. Policy considerations
1. Tension b/w debt and equity – corps are encouraged to finance their operations with debt rather than equity. Both financial incentives and tax incentives
a. Danger – built-in incentive to overextend debt, be undercapitalized. Apparent in recent years
2. Who pays corp tax? Consumer. So we have 3 choices when reforming: 1) shift back to labor; 2) shift forward to consumers; or 3) shift to the owners of the capital (sh)
ii. Overall Tax system
1. Basic tax system – we studied provs in basic tax that apply to anyone engaged in trade or business, including corp
a. s. Ex: capitalization, depreciation, business deduction for paying wages
2. Corporate tax – IRC provs unique to corps. Only apply when do bus in corp form
a. Rationale – tax shouldn’t interfere w/ business decisions. Inefficient if it does
b. Policy/basic principle behind
i. Gen – We want corps to behave in certain way. Corp in bus to earn profit, and after paying tax on profit, will either reinvest in corp or pay div. Unproductive to just keep after-tax profits and accumulate
ii. Penalty – if corp not behaving in way we want — for ex by accumulating earnings instead of reinvesting or paying div, putting into CDs, putting into treasury note or bank acct or other investments — then we penalize
1. Note: is ok to buy other companies, become a conglomerate…that’s just expanding the business
c. § 11 – corp tax rates:
i. 15% 0-50k
ii. 25% 50-75k
iii. 34% 75k-10 million
iv. 35% if10 million +
1. Add the lesser of:
a. $11,750; OR
b. 5% of excess over 10m
2. if 15m or more, add the lesser of:
a. $100,000; OR
b. 3% of excess over 15m
d. Interest deduction – can reduce corp tax by financing w/ debt. By contrast, if corp pays a div, corp can’t write that off
e. Cap gains rate N/A – Unlike individuals, corporations can only offset capital gains with capital losses.
3. Capital gains rate
a. 15% – 15% for dividends and capital gains in most cases (can be as low as 5%),
i. Note – dividends used to be treated like ordinary income
b. N/A at corp level – Unlike individuals, corps pay regular income tax rates on cap gains. corporations can only offset capital gains with capital losses.
b. Tax considerations – provs of the IRC that are unique to corporations
i. § 243: Dividends received by corporation – Gen – When 100%-owned sub pays parent, some of that goes to pay sh in parent. § 243 says al long as income paid by sub to parent remains in corporate solution, the full tax should not be imposed. Shouldn’t be taxed twice
ii. Incentive for closely held corps to OVERCOMPENSATE
1. Gen – corp arrange their affairs so that they pay out all their income in compensation so earnings are either zero or in small tax bracket.
iii. § 351: Transfer to Corporation controlled by Transferor – in certain situations, can xfer property into a corporation tax free
iv. § 704: Partner’s distributive share –
c. Various ways of doing business (prof’s handout: Factors Affecting Form of Business Operation)
i. Ways of doing business (J added this for simplicity)
1. Sole proprietorship (bus and owner are one)
a. Record keeping – should keep separate records to know which income and expenses are attributable to bus v. personal
b. Tax for – part of owner’s 1040. Files schedule C that reports income and takes bus deductions
2. Partnership
3. Corporation
4. Entities
a. Proprietorship (goes through the 6 considerations below) –
b. Joint venture
c. Partnership (other than corp, the one you’ll have most contact with)
d. ————————- (below are the corps)
e. Limited partnership –
f. Publicly-traded partnership (taxed as a corp)
g. LLC –
i. Can be taxed as association and therefore a corp (if you elect), but taxed as partnership if you don’t elect
h. Corporations
i. C corporation – a tax-paying corporation
ii. S corporation – a hybrid. Some aspects of a corp, but mostly aspects of a partnership
1. Limited # of shareholders
i. Special considerations (Mutual fund, REIT, REMIC, etc) –
5. Choosing an entity
a. Non-tax considerations
i. Limited liability for owners (often most significant, but not always)
1. Gen – if things don’t go as expected, creditors can’t touch owners; personal assets they have outside the business
2. Ex: limited partnership, LLC, corp
ii. Management efficiency (centralization of management)
1. Gen characteristic of a corp
iii. Flexibili

alized b4 the rest of the income is distributed. Must take reasonable compensation
a. Ex: Mom owns 50%, kids 25% each. 300k taxable income. Market rate for Mom is 150k, she doesn’t take salary. They allocate interest 50, 25 25. Pays 150k to mom and 75 each to kids, according to the P agreement. Can’t do that per 704e.
i. First – mom must take 150k
ii. Of what’s left- can’t be disproportionate to actual investment of capital. So of 150k remainder, at least 75k goes to mom and 37.5k each to kids
ii. Taxation of retained/distributed profits
1. Income allocated each year to the partners, flows through, so doesn’t matter if retained or distributed
iii. Tax benefits from current losses
1. Flow through to the partners
iv. Tax aspects of financing options
1. Interest payments are ded…not much to say here
v. Taxation of sale of bus (different than both prop and corps)
1. Gen rule: capital gains and losses
a. 3 exceptions (really 2)
i. Substantially appreciated inventory –Ex: can’t set up P to buy diamonds, wait for them to appreciate, then get cap gains rate on sale. taxable as ord income.
ii. Unrealized receivables – if cash method and haven’t reported since not yet paid. If you sell ur interest, then you have ord income. Acceleration effect at moment of xfer (except on S corp, u just sell the stock)
iii. Recapture of depreciation – to ext gain is attributable to depreciation, that’s subj to recapture and depreciation rules, and you’ll have ord income on that gain
vi. Protection of increase in value from income/estate tax
1. Easy to xfer in property in a partnership. Not like with corp, where § 351 limits ability xfer into corp tax free
2. § 721-723: xfers in to a partnership, non-recognition of gain, basis of partner’s interest, basis of property xfered