Limiting the liability of the owner(s) of a business is often the primary motive for using the corporate form. Under what circumstances may the use of a corporation not shield the owner(s) from al liabilities of the business?

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Beverley SmithLv2

25 Jul 2019

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Conducting their business as a C corporation, an Scorporation, or an LLC would meet Bill and Georgeâs objectives ofhaving limited liability. From a tax perspective, both the Scorporations and the LLC would allow the losses in the early yearsto be passed through to the owners. This cannot be achieved with aC corporation, which would be required to carry over the losses tofuture years in which the company is profitable. Once the entitystarts earning money, the tax consequence are asfollows:

As a C corporation, the entity would pay income tax of$61,250 on taxable earnings of $200,000. If the remaining after-taxearnings of $138,750 are distributed equally to Bill and George(each owner would receive a taxable dividend of $69,375), eachshareholder pays an additional income tax of $10,406 ($69,375 X15%). The combined entity/owner tax liability is $82,062, resultingin after-tax cash flow of $117,938.

If the entity is operated as an S corporation or an LLC,no tax is paid at the entity level. However, the entire $200,000 istaxed as ordinary income at the owner level, resulting in eachowner paying $28,000 ($100,000 X 28%) income tax. The combinedentity/owner tax liability is $56,000 resulting in after-tax cashflows of $144,000

Evaluate and discuss the comparative forms of doingbusiness and discuss the pros and cons of each, explaining yourrationale in detail. Which form would you use? Why?

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Compare and contrast the tax rules and treatment applicable tocorporations and partnerships. Indicate the major way in which thetax treatment affects the shareholders or partners. Explain atleast two (2) reasons why a business owner might opt to become apartnership over a corporation. Provide support for your rationale.Imagine that you are a consultant and make the recommendation thatthe most advantageous business structure is a C-corporation.Justify why you would recommend a Corporation over a Partnership.Indicate tax rules that influenced your decision. Analyze what abusiness owner must consider when deciding what type of entity isbest for the goals and vision of the business. Provide at least two(2) examples of research the owner must perform to ensure theproper election is made. Provide support for your rationale. Use atleast two (2) quality academic resources in this assignment.

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Mickey, Mickayla, and Taylor are starting a new business (MMT).To get the business started, Mickey is contributing $228,000 for a40 percent ownership interest, Mickayla is contributing a buildingwith a value of $228,000 and a tax basis of $171,000 for a 40percent ownership interest, and Taylor is contributing legalservices for a 20 percent ownership interest.

What amount of gain is each owner required to recognize under eachof the following alternative situations? [Hint: Look atÂ§351 and Â§721.]

a. MMT is formed as a C corporation

b. MMT is formed as an S corporation.

c. MMT is formed as a LLC.