Business Organization

There are many types of business entity defined in the legal systems of various countries. These include corporations, joint ventures, partnerships, sole proprietorship, Limited Liability Company and other specialized types of organization.The Internal Revenue Code sets out different tax guidelines for several different forms of business organizations. In very conventional terms, it is not possible to relate the differences in tax consequences to any substantive non tax attributes of these different legal forms of doing business, except that businesses that wish to access the public capital markets generally must be taxed as regular corporations (Harmelink, Hasselback, and Smith, 2010).

The Code affords business enterprises and their owners the effective flexibility to elect one tax treatment of another without varying any of the meaningful non-tax substantive relationships among the enterprise and its owners (Tax Reform, 2008). C corporations, the original taxpayers of our current tax system, were for many years the principal business entity form that could offer limited liability to investors. C corporations are subject to entity level tax in addition to any tax on distributions to shareholders. Partnerships offered the tax advantage of only one level of tax, at the investor level, but for many years Federal taxation as a partnership required at least some exposure to business liability, through a general partner.

The opportunity for taxpayers to elect to conduct a business through either a taxable entity, or a corporation or a nontaxable entity is a Tax Induced Structural Distortion under the proposed definition (Tax Reform, 2008). As a general rule, operation of a business through an entity may enhance efficiency by providing owners with mobility to combine and transfer assets and to distribute tax attributes to different investors. On the other hand, the availability of multiple entity types with different tax treatments may induce taxpayers to...