Tax Consequences to Change From a Corporation to a Partnership
Corporations and partnerships are not only structured differently, there are different tax implications for each type of entity. Although corporations are required to pay tax on profits, there are specific tax-deductions available to corporations. Partnerships, however, do not have as many deductions available to them and taxes are levied in a different way.
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Corporate Taxation
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Corporations are taxed differently than partnerships in that corporations are responsible for paying taxes on all profits. Taxable profits include whatever monies the corporation has for operating expenses and the profits passed on to its shareholders as dividends. Corporations have specific tax deductions available to them, including the ability to deduct the costs of retirement plans and salaries paid to employees.
Partnership Taxation
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Because a corporation is considered a separate entity from its owners, the corporation itself is taxed. However, a partnership is not considered separate from its partners. In a partnership, taxes are passed to partners. As such, partners are required to pay taxes --- via personal/individual tax returns --- on their portion of the partnership's profits. Each partner is responsible for setting aside enough money to pay their taxes, which are typically paid to the IRS in quarterly installments.
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Corporate Shareholders
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Although many corporate entities are required to pay tax on profits/income, some corporations --- such as C-corporations --- are taxed similarly to partnerships. Just as partners are required to pay taxes on their portion of the profits, the shareholders in a C-corporation are required to pay taxes on any profits passed to them.
Additional Considerations
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The tax consequences for changing from a corporation to a partnership differ, depending on the type of corporation involved. Partnership taxation is typically less complicated than corporate taxation. However, if the change is from a C-corporation to a partnership, taxation is structured similarly.
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