Recommend a type of business entity for the client to consider based on your tax research. Justify your recommendation using the code and regulations that relate to the business entity.
Four categories of business are defined by the 26 United States Code, including S Corporation, Corporations, and Sole Proprietorship. Thus, Bob can choose from any of the four business entities. According to the Code, S Corporation is corporate entities that ensure that federal taxes are passed on to existing shareholders through elections. They pass revenues, credits, corporate losses, and also deductions (Lawrie, 2019). The flow reveals the revenues and losses of the company shareholders' personal returns. A further assessment of the rates of their individual income taxes takes place. They do so to avoid corporate income double taxation. Limited liability is a privilege enjoyed by corporations, and being one, S corporation, is entitled to it. S corporation is required to be a domestic one only with the allowable shareholders.
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Basing on the US C26 Code and regulation, I believe the best option for Bob is to open an S Corporation. S Corporation is his most suitable the most suitable because, as an entity, the business needs to be treated separately from the owner, and that comes with the benefit of a flow-through entity (Rutledge, 2014). Bob will only be allowed to have his income taxed once via the personal income tax return. In case there is a lawsuit, he gets to enjoy limited liability as well.
2.Justify whether or not the client should choose a business entity that has limited liability protection. Include possible future liability issues based on the potential economic impact and appropriate Internal Revenue Code and Treasury regulations.
Bob has a significant amount of liability, including a mortgage that he has to pay a $19,200 interest, medical expenses, $8,000 property taxes, credit card debt ($1,800), and a $5,000 personal legal expenses, amongst others. This implies that he must look for limited liability protection that will only be granted by the proper business entity (Friedland, 1996). Such an entity will give him protection from these personal liabilities for claims and business debts. In case the business is not in a position to settle its obligations, the persons or companies he owes money can only come for business assets and not his assets.This means that Bob can only lose his investments in the business and not personal investments.
3.Describe the tax effect on the recommended business entity and the impact it will have on the client’s personal tax return. Address how the choice of business entity affects the completion of the 1040 tax form.
As contained in the 26 US Code § 1363, an S Corporation taxable income is calculated just like for personal income taxes. However, items of revenue, loss, credits or deduction, 703(a)(2) deductions, are exempted, and Section 248 and Section 291 applies. Additionally, it is a requirement by the 26 US Code § 1366 that the shareholders’ aggregate amount of losses and deduction should not exceed the total adjusted basis of the S Corporation shareholders’ stocks and their adjusted basis of any of the company’s debt (Estreicher & Green, 1997).
Based on the 1120S, after an entity completes its pass-through return, the shareholders are required to transfer their net losses, and income ratio as the company’s Schedule K-2 return on to their personal returns, Schedule E Part II provisions state. This makes the shareholders to be compliant to the US Code and to file their losses and incomes related to their business separate from other income sources.
4.Evaluate the economic impact on the client’s personal returns based on the recommended entity. Justify why the client would not choose the other business entities by informing the client of the differences.
From the above analysis, I have recommended an S Corporation for Bob. S Corporation was the most suitable business entity choice because the business will get taxed only once, unlike with the regular corporations that are taxed double ( Blackwell, 1998) . Based on the provided information, here is a justification for Bob not to choose other forms of business entities for his case.:
| S Corporation | C Corporation | |
| C corporation Tax(40%) | 0 | -200000 |
| Business’s net income | 500000 | 500000 |
| Shareholders Net Income | 500000 | 300000 |
| Personal Tax (-36%) | -180000 | -108000 |
| After-tax Income | 320000 | 192000 |
From my illustration above, if Bob chooses to go with an S Corporation over other entities, after the financial year, he will have not less than 60% more income after deduction of taxes.
5.Justify your recommendation regarding the client’s daughter having an ownership interest. Provide details supporting the recommendation taking into consideration the jargon and mechanics of the trans
As provided in the 26 US Code § 1361 (c) (1), for the 100 shareholder limitation, all family members and their estate are treated as one. The definition of 1361 code is that “family members are a common ancestor, any descendant of such a common ancestor (the children), and any spouse or former spouse of this common ancestry.”
The 2005 Act Section 403(b) did away with the requirement that there has to be an election by the family members for it to qualify a shareholder treatment. Therefore, all the members of the family can be subjected to the limitation of 100 shareholders.Clearly, Bob’s daughter qualifies to her business interests, and equal shares amount can be appropriately issued. This will be determined by her contribution to the business (Beckerman-Rodau, 1988). Bob and her daughter’s percentage interest percentage business ownership requires determination, as based on their individual contribution to the company.
References
Blackwell, T. F. (1998). The Revolution Is Here: The Promise of a Unified Business Entity Code. J. Corp. L. , 24 , 333.
Beckerman-Rodau, A. (1988). Selecting a Business Entity for a Small Business: Non-Tax Considerations. Dick. L. Rev. , 93 , 519.
Estreicher, A. G., & Green, W. S. (1997). Heavy Duty II: Forming a Business Entity in the United States. NYL Sch. J. Int'l & Comp. L. , 17 , 307.
Friedland, J. A. (1996). Tax Considerations in Selecting a Business Entity: the New Entity Classification Rules. DePaul Bus. LJ , 9 , 109.
Lawrie, G. R. (2019). What business entity should a startup choose?. Book review , 27 (2), 44.
Rutledge, T. E. (2014). A Corporation Has No Soul-The Business Entity Law Response to
Challenges to the PPACA Contraceptive Mandate. Wm. & Mary Bus. L. Rev. , 5 , 1.
