Question

1. Partnership Formation.  What are the basic tax rules for partnership formation and operation?
2. LLCs. Discuss the pros/cons of a LLC. Does your state allow the LLC form of business?
3. At-Risk Rules. Discuss the At-Risk rules and the passive loss rules. How do these rules affect a taxpayer? Should we have these rules?

Answer 1

Partnership Formation:

Partnership and proprietory are the two basic types of businesses to establish and operate. In a partnership there are two or more members jointly starts a business is called a partnership. partnerships did not have corporate taxes. the profits come are divided into individual partners and from their personal tax filings, the tax would be calculated individually.

LLCs:

LLC is a Limited Liability Company that is a business or corporate structure in the united states. In Limited Liability Company, the owners are personally not responsible for the company's debts and liabilities. The rules and regulations vary for LLC from state to state. The owners of LLC are called the members and this LLC is a hybrid form of partnership and proprietory. It means an LLC may be in terms of the partnership or sole proprietory. An LLC is easier to set up rather than a corporation.

The formation of LLC is the members first decide a name for this and after that, they prepare Articles of Organization and well documented and filed with the state.  In the article of organization, it would be mentioned in detail all the rights and duties, powers, liabilities, and all the other obligations.

The Pros and Cons for LLC are as follows:

Pros:

It is easy to form or establish and operation.

It protects the owners from personal liability

flexibility in tax options

It can be having any number of members, there is no limit for the members

there is no restriction on payment to members

Cons:

It concerns the structure of a corporation depending on the state laws

An LLC may have to be dissolved on bankruptcy or death of a member

The formation cost and fee vary from state to state

It is difficult to raise capital from outside.

At-Risk Rules:

will discuss here at-risk rules and passive loss rules and how these rules affect a taxpayer

At-risk rules are described your investment and risk on any entity where you invested and passive loss rules describe your involvement in that entity or operation where you are involved in it.

at-risk rules are limiting the tax loss and it will claim and limiting the losses an investor. only that amount would be deducted which is actually at risk.

losses if any would be deducted from the business investment to reduce the tax liability to an entity.

for example: if a person involved in a business with an investment of $20,000 and it will run smoothly for some time after a few years he will be at risk of his $20,000 liability. in this situation, if he comes under the tax bracket of 28% and 8% of federal and state tax slabs. in this situation, he has to reduce his tax liability by (28% + 8%) = 36%. that means 20000 * 36/100 = $7,200.