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Brown 1TAX 655Milestone 3Jordan BrownOctober 8, 2017
Brown 2October 8, 2017Mr. Robert Jones5100 Lakeshore DrivePensacola, FL 32502Dear Mr. Jones:You currently operate a used car dealership in Florida as a sole proprietorship. You wish to know whether a partnership, an S corporation or a C Corporation would be better suited to your future business goals. There are several issues to be considered when selecting a business entity. These include legal liability of the entity, tax consequences of converting the business, profit sharing and estate planning. I believe that an S Corporation offers you the most benefits to with the least tax consequences. Business EntityLiabilityOne of the biggest concerns when operating a business is liability. As a sole proprietorship, you have no liability protection. Although you should have good umbrella insurance, this would not protect your personal assets from business debts and obligations. With a personal net worth of $14 million it is extremely important that you protect your personal assets form business liability. While both S and C corporations offer limited liability protection, apartnership does not and for this reason, I would not recommend you form a partnership.Tax BenefitsThe tax benefits of different business entities are extremely important in deciding what type of business to form. If you chose a C corporation, both you and the business would pay
Brown 3federal income taxes. In contrast, an S corporation does not pay federal income taxes as it is considered a pass through entity. A pass through entity passes its “income, expenses, losses, credits and other tax-related items through to the partners/shareholders who report these items ontheir separate tax returns” (Rupert, Pope & Anderson, 2016). When computing federal income tax for an S corporation“There shall be taken into account the shareholder’s pro rata share of the corporation’s (A) items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder, and (B) non-separately computed income or loss” (26 USC § 1366)This means that you, and not the company, would pay federal income tax. In most states, you would pay state income tax as well. However, Florida does not have a state income tax. “The realbenefit of operating in Florida, however, is that the state doesn’t impose any income tax on residents [….] they are not required to pay taxes to Florida as they would in the majority of statesthat do tax individual incomes” (Franco, n.d.). Another tax benefit on an S corporation is that youdo not have to pay 100% of self-employment tax like you would in a partnership or sole proprietorship. “If you organize your business as an S-corporation, you can classify some of yourincome as salary and some as a distribution. You’ll still be liable for self-employment taxes on the salary portion of your income, but you'll just pay ordinary income tax on the distribution portion” (TurboTax, 2016).