Tax Memo: Entity Selection Issue

Tax Memo: Entity Selection Issue

Tax Memo

Tax Memo: Entity Selection Issue

FROM: John A. Ginsburg

TO: Mark, Penelope, & John

August 16th, 2013.

SUBJECT: Issues & Considerations Related To the Selection of New Business

Issues & Considerations

This memo focuses on the issue and consideration related to the structure and taxation of new business entity that must be established by Mark, Penelope, and John.

The relevant considerations of tax and non-tax issues are illustrated below:

Different types of entities available to Mark, Penelope, and John.

Most suitable type of entity for them and logical reasoning for this type of entity.

Tax consequences of contributing property, cash, or services to this type of company.

Taxation of such entity and filing requirements it has with the Internal Revenue Service.

Earnings and sharing of profit among partners.

Individual taxation with respect to the net earnings from the organization & their filing requirements with the Internal Revenue Service.

Partner's calculation of their basis in the new organization, particularly the impact of debt on their basis.

Exposure that partners' personal assets will have to the debts and lawsuits of the entity.



Recommendations

Different issues and considerations related to the new entity selection are discussed below with suitable recommendations.

Different types of entities are available to Mark, Penelope, and John, including Sole Proprietorship, Partnership, Corporation, Limited Liability Company, and Small Business Corporation (S-Corporation).

Among all the forms of business entities, the most suitable form of business that is recommended in this case is “Limited Liability Company”. LLC is relatively a new type of business firm and it offers the tax advantages of a partnership and the limited liability of a corporation. This form of entity is most suitable for Mark, Penelope, and John to structure their company because it offers great many advantages to them and their disadvantages are relatively less, will not affect highly. The major reason behind this choice is that the liability of all three partners will be limited to their sum of investment in the company. Profits will be passed through LLC and taxes will be paid personally by each of owners of a company (Miller & Hollowell, 2010). In addition, one of the other major advantages it offers is the flexibility of operations as per partners' decision through a simple operating agreement. Moreover, there will not be any limit on the number of shareholders in the firm. On the other hand, its disadvantages are just few, including formalities and reporting requirement, as well as limited transferability of ownership (Schneeman, 2012). These disadvantages are not of much concern to the partners given their current scenario, and the advantages of limited liability, tax treatment, ability to raise capital, and flexible management are attractive enough to go for LLC.

Cash contributions in this form of entity are not much different than partnership or corporation. No gain or loss will be recognized and the basis of contributors for the interest or stock he will receive is normally equal to the amount he will contribute. However, property contribution will have a considerably different affect, ...