Page 165 - Business Principles and Management

Unit 2

Why would the corporate
form of ownership be suited
to a solar energy plant?

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CHECKPOINT

List three types of organizations that are specialized alliances
between companies or individuals.

Other Limited Liability Corporations

Small, growing partnerships are especially attracted to the limited liability
company (LLC) form of corporation or Subchapter S corporation. The lim-
ited liability company is a special type of corporation allowed by states that
is taxed as if it were a sole proprietorship or partnership. Two factors make
LLCs popular. First, a major disadvantage of a partnership is its unlimited
liability, whereas a major advantage of a corporation is its limited liability.
Second, a major advantage of a partnership is its lower income tax rate,
whereas a disadvantage of a corporation is a higher income tax rate than
that paid by partnerships. Stockholders also have to pay personal income
taxes on dividends distributed by a corporation (double taxation).
A Subchapter S is a special type of corporate tax status that offers liability
protection but allows taxation like a partnership, avoiding double taxation. To
qualify, a corporation elects to be taxed under the Subchapter S corporation regu-
lations of the U.S. Internal Revenue Service (IRS). However, not all companies are
eligible for Subchapter S status. A few important rules determine eligibility. First,
the firm must have no more than 100 stockholders. Second, it must be a domestic
corporation and not have any nonresident aliens as stockholders. Third, it must
have only one class of stock. Finally, it must meet a list of other specific limita-
tions specified by the IRS, such as not being a bank, insurance company, and so
on. Large corporations and multinational firms do not meet these qualifications.

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