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are at risk in the case that the business get sued and because it have limitationsthat keep it from becoming a large business. Corporations – In forming a corporation, prospective shareholders exchangemoney, property, or both, for the corporation’s capital stock. A corporationgenerally takes the same deductions as a sole proprietorship to figure its taxableincome. A corporation can also take special deductions. For federal income taxpurposes, a C corporation is recognized as a separate taxpaying entity. Acorporation conducts business, realizes net income or loss, pays taxes anddistributes profits to shareholders. The profit of a corporation when earned, andthen is taxed to the shareholders when distributed as dividends. This creates adouble tax. The corporation does not get a tax deduction when it distributesdividends to shareholders. Shareholders cannot deduct any loss of the corporation.On the other hand, the advantages of opening a business as a Corporation is thatthey can obtain external financing faster by selling their stocks, and in case thecompany gets sued, the shareholders are only liable up to the amount of theirinvestment to the business. I believe this is not a good option for Bob because his business would be subjectto the double taxation of any earnings he decides to distribute as dividends. He
would receive less money made from a distribution when compared with any ofthe other business structures. S Corporations – S corporations are corporations that elect to pass corporateincome, losses, deductions, and credits through to their shareholders for federaltax purposes. Shareholders of S corporations report the flow-through of incomeand losses on their personal tax return and are assessed tax at their individualincome tax rates. This allows S corporations to avoid double taxation on thecorporate income. As corporations, the shareholders enjoy limited liability. Scorporations are responsible for tax on certain built-in gains and passive income atthe entity level. To qualify for S corporation status, the corporation must meet thefollowing requirements:oBe a domestic corporationoHave only allowable shareholdersMay be individuals, certain trusts, and estates and May not be partnerships, corporations or non-resident alienshareholdersHave no more than 100 shareholdersHave only one class of stockNot be an ineligible corporationI believe opening Bob’s business as an S corporation is the best option for Bob, becausethe business will be considered a separate business entity with the benefits of being aflow-through entity. This means that the income will be subject to taxation once throughthe shareholder’s personal income tax return. Also, the S corporation’s shareholders enjoylimited liability in the case of a lawsuit.
F. Justify whether or not the client should choose a business entity that has limitedliability protection. Be sure to include possible future liability issues based on thepotential economic impact and appropriate IRS code and regulations.