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).