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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.
Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.
In addition to taking advantage of the lower rates for individuals, the pass-through entity eliminates double taxation associated with the payment of dividends from C corporations.
This article demonstrates how to ensure that such distributions do not cause unexpected tax results.As a result of the fact that the maximum corporate tax rate exceeds the maximum individual rate for the first time in seventy-three years, there is renewed interest in "pass- through" entities (i.e., S corporations and partnerships) as tax-favored ways of conducting a business.Current distributions of appreciated property from S corporations produce gain at the entity level whereas distributions of such property from partnerships generally permit a deferral of taxable gain. Byrd is associated with the law firm of Petree Stockton & Robinson in Raleigh, North Carolina. S Corporation Distributions Section 1363(d) requires an S corporation to recognize gain on the distribution of appreciated property to its shareholders.No deferral of gain at the time of the distribution is available.A major difference between partnerships and S corporations involves the treatment of distributions of appreciated property.