S corporations typically are more expensive to organize and require greater attention to the maintenance of corporate formalities than is required with partnerships.
However, the corporate form usually provides owners with a greater degree of insulation from business liabilities than does the partnership form.
As opposed to a mutual fund, however, instead of buying individual stocks, these funds usually make large investments either in private companies or in public companies that they “take private” (more on that in a minute).
While mutual funds and most hedge funds try to make money by guessing where securities prices will go in the future, private equity funds try to make money by taking control of companies and actively managing them.
There are subtle (and some not so subtle) differences between the two entities from a tax perspective as well.
One significant difference exists with respect to distributions of appreciated property. This article previously appeared in the Tax Assessment newsletter, published by the North Carolina Bar Association, and is reprinted with permission.
To view this Portfolio, take a free trial to Bloomberg BNA Tax & Accounting This Portfolio is available with a subscription to Bloomberg BNA Tax & Accounting, a comprehensive research solution including over 500 Tax Management Portfolios, practice tools, primary sources and timely news. 720-2nd, Partnership Transactions—Section 751 Property, analyzes the federal income tax consequences of (1) a sale or exchange of a partnership interest where the partnership owns a §751(a) property (i.e., unrealized receivables and inventory items) and (2) a distribution from a partnership owning §751(b) property (i.e., unrealized receivables and inventory items which have appreciated substantially in value) where such distribution has the effect of changing the proportionate interests of the partners in the §751(b) property. Review of Overall Results of the Application of § 751(b) G. Tax Reporting Obligations - Statements Required to Be Filed by Partnership and Distributee Partners I. Other Property Subject to Recapture by Reference to § 1245 3. Oil, Gas, Geothermal, and Other Mineral Property d. Stock of Domestic International Sales Corporations f.
It creates investment funds that raise most of their money from outside investors (pension funds, insurance companies, rich people, etc.), and then manages those funds.
The partnership tax provisions – Subchapter K of the Internal Revenue Code – work pretty well.
And they have a difficult job to do because they must provide a reasonable mechanism for taxing arrangements between parties that can be far from off-the-rack.
It should not be difficult to figure out how to tax two individuals who contribute equal amounts of cash to start a joint business in which each will own a one-half interest.
But it quickly becomes problematic when one if the two partners wants a greater share of early receipts in exchange for a lower share of back-end gains.