Wk 2 - Milestone 1 - Formation of a business entity - completed

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DRAFT Formation of a Business Entity Alicia Banks TAX 655 June 5, 2016 Professor Al Weidinger 1
DRAFT TO: BOB JONES FROM: SUBJECT: ANALYSIS AND RECOMMENDATION FOR A BUSINSS ENTITY DATE: JUNE 5, 2016 CC: PROFESSOR AL WEIDINGER ISSUE: FORMATION OF BUSINESS ENTITY Mr. Bob Jones, a retiree, operates a successful used car business in Florida and is considering a change in business entity. He has asked for a recommendation to determine what business entity structure will best suit the needs of Mr. Jones and his daughter Mandy Jones. LAWS AND ANALYSIS: There are various options for a business entity. The three factors to consider when choosing a business entity are liability, taxation, and recordkeeping. In my analysis of these three factors in relation to Mr. Jones, these are my findings: Legal liability – To what extent does Mr. Jones need to be protected from legal liability? Mr. Jones is currently the sole investor of this business and the sales contracts that he enters have substantial risk because they are dependent on the buyer fulfilling their 2
DRAFT contractual obligations. Therefore the business lends itself to potential liability. With those factors in mind, a sole proprietorship or partnership could bring substantial financial harm to both himself and his daughter as part owner. The number one reason that business owners incorporate is to protect personal assets. However, we can also take into consideration that Mr. Jones is not operating a business that disallows good umbrella insurance policies to take care of any potential liability that may arise (Khwaja, 2016). Since Mr. Jones is contemplating giving 40% of the business interest to his daughter, he could consider a partnership. In general partnerships, both partners manage and assume responsibility for the debt and obligations of the business. This type of entity is harder to form than a sole proprietorship due to the legal and accounting services needed, and will need to include a well drafted partnership agreement to avoid litigation in the event of a disagreement. Mandy Jones may consider this entity advantageous, since she is only 23 years old with no qualifying dependents, a partnership in the business can help reduce her taxable income since the profits and losses of the business pass through her personal income taxes. The S Corporation can offer tax advantages and is still considered a pass-through entity. Each shareholder is responsible for his/her portion of profit and loss. However, some things should be taken into consideration prior to electing the formation an S Corporation. First, the costs of forming and maintaining an S Corporation are time consuming and expensive. While the expenses related to starting an S Corporation can be deducted as business expenses, these fees are not experienced when choosing a partnership or proprietorship. Secondly, the S Corporation can only have one class of stock which can be voting or non-voting and have no more than 100 shareholders, of which all must be domestic (Khwaja, 2016).

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