Andy, Jim and Dwight are starting a professional paper shredding company, and they are still exploring the pros
and cons of the following types of legal entities:
- Limited partnership
Andy and Jim will each contribute $200,000 in cash in exchange for their ownership interest. Dwight will contribute a warehouse that he owns that will be used to house the shredder machines. The warehouse has an FMV of $290,000 and is encumbered by a $90,000 mortgage. Dwight purchased the warehouse 3 years ago for $180,000. It was agreed that the profit and loss from the company's operations will be divided equally (i.e. 1/3 each) amongst the three owners.
Andy will manage the company's operations in exchange for $75,000 in compensation per year. Jim and Dwight will have minimal involvement in the company's operations, as they also own and manage full-time a company they formed as an LLC that sells pickled beets.
In addition to the $90,000 mortgage on the warehouse that is considered qualified nonrecourse financing, the company will also have a $180,000 recourse loan with a local bank and $75,000 in nonrecourse accounts payable. Jim and Dwight will not be included as guarantors for the recourse loan.
Although the limited partnership is also a flow-through entity and allows for the 20% qualified business deduction similar to the S-corporation, Andy's effective tax rate would be higher if the owners formed a limited partnership when compared to his effective tax rate with an S-corporation due to the additional imposition of self-employment taxes.
TRUE OR FALSE
1.) C-corporation: Formulation of C-corporation is very difficult in case of paperwork and regulations but it provides an... View the full answer