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Final ProjectTax 655Abigail Aquilino
RecommendationMy recommendation would be for Bob Jones to form an S corporation. Since Bob wants to involve his daughter Mandy as an owner, the company will no longer be able to run as a sole proprietorship. Forming a partnership is an option, however, both parties can be held liable for business debts and losses and the partnership would dissolve when Bob passes away. Forming anS corporation is the best option because Bob and Mandy could be the only shareholders which would give them complete control of the business. Other advantages include limited liability and no double taxation. Bob would first have to convert his business to a corporation and then file Form 2553 to become an S corporation.Advantages and DisadvantagesSince Bob’s business has inventory, he must use the accrual method of accounting. The accrual method provides a more accurate picture of overall cash flow because transactions are recorded when they occur not when the money was exchanged. This method is preferred for GAAP. Some disadvantages of the accrual method are that it is more complicated than the cash method, requires monthly reporting and taxes are paid on cash that isn’t received yet. While the cash basis also has advantages and is simpler, businesses using the cash method are placed under more scrutiny by the IRS. The cost to file Form 1120S which is required for S corporations is $778, which is a lot more compared to $174 for Form 1040 Schedule C, it is less than the $817 for a corporation which would need to be formed for Bob’s business so he can involve his daughter and ensure the company continues after he passes.
Forming an S corporation has many tax benefits. The first is that the entity can be taxed only at the individual level, avoiding double taxation and self-employment tax. Other advantagesinclude limited liability for managers and shareholders, protection from personal liability, privacy protection, and can have unlimited management personnel.One of the advantages of an S corporation is limited liability protection. Limited liability protection is the legal protection for shareholders of corporations that limits the financial liabilityof the company’s debts to the par value of the shareholder’s shares. The rest of the liability falls on the company itself. This will protect Bob and Mandy’s personal income from the debts of the company. S corporations also provide fringe benefits for employees. Some benefits include retirement planning and medical benefits. The corporation can also deduct the expenses that are required to pay for these benefits. Tax Law Relating to S CorporationsTo qualify as an S corporation the corporation must be a domestic corporation, have only allowable shareholders (individuals, certain trusts, and estates), have no more than 100 shareholders, only one class of stock and not be an ineligible corporation (IRS, n.d.).