are at risk in the case that the business get sued and because it have

Are at risk in the case that the business get sued

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are at risk in the case that the business get sued and because it have limitations that keep it from becoming a large business. Corporations – In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. The profit of a corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation. On the other hand, the advantages of opening a business as a Corporation is that they can obtain external financing faster by selling their stocks, and in case the company gets sued, the shareholders are only liable up to the amount of their investment to the business. I believe this is not a good option for Bob because his business would be subject to the double taxation of any earnings he decides to distribute as dividends. He
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would receive less money made from a distribution when compared with any of the other business structures. S Corporations – S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax return and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. As corporations, the shareholders enjoy limited liability. S corporations are responsible for tax on certain built-in gains and passive income at the entity level. To qualify for S corporation status, the corporation must meet the following requirements: o Be a domestic corporation o Have only allowable shareholders May be individuals, certain trusts, and estates and May not be partnerships, corporations or non-resident alien shareholders Have no more than 100 shareholders Have only one class of stock Not be an ineligible corporation I believe opening Bob’s business as an S corporation is the best option for Bob, because the business will be considered a separate business entity with the benefits of being a flow-through entity. This means that the income will be subject to taxation once through the shareholder’s personal income tax return. Also, the S corporation’s shareholders enjoy limited liability in the case of a lawsuit.
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F. Justify whether or not the client should choose a business entity that has limited liability protection. Be sure to include possible future liability issues based on the potential economic impact and appropriate IRS code and regulations.
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