Tax Paper
Abstract Research and Recommendation on CTC’s Choice of Entity type
Case Review
Our client, CTC, design and manufacture cookware that remains cool to the touch when in use. The company originally has three investors, Dawn, Linda and Mike with different contribution. Dawn is single with no other jobs, will contribute land and cash with 30% ownership interest. Linda is married, will contribute services with 30% interest. Mike will contribute cash and 40% ownership and he will not involve in the business. They planned to grow the business and seek more owners and capital in the future. They would borrow $800,000 for building and $300,000 from local bank and $200,000 from Mike for additional cash. They believe the company will take a few years to become profitable. The company will either go public or sell to large retailer after grow. The company has asked us to research what kind of entity to form. A business may choose to operate as either a C corporation, an S corporation, a limited liability company, a limited partnership, or a general partnership. “A general partnership, the liability of each partner for partnership debts is unlimited. Thus, these partners are at risk for more than the amount of their capital investment in the partnership.” In fact, one of the original investors, Mike wants to become a passive investor in CTC and does not liable for all partnership debts. The choice of a general partnership entity is not suggested to CTC, because it is not meet the requirement of its investor. “A C corporation is subject to double taxation. Its earnings are taxed first at the corporate level when earned, then again at the shareholder level when distributed as dividends.” It means that the business will be costlier to start than other business entities. Section 351 governs whether transfers to a corporation are tax-free or taxable. “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in
Case Review
Our client, CTC, design and manufacture cookware that remains cool to the touch when in use. The company originally has three investors, Dawn, Linda and Mike with different contribution. Dawn is single with no other jobs, will contribute land and cash with 30% ownership interest. Linda is married, will contribute services with 30% interest. Mike will contribute cash and 40% ownership and he will not involve in the business. They planned to grow the business and seek more owners and capital in the future. They would borrow $800,000 for building and $300,000 from local bank and $200,000 from Mike for additional cash. They believe the company will take a few years to become profitable. The company will either go public or sell to large retailer after grow. The company has asked us to research what kind of entity to form. A business may choose to operate as either a C corporation, an S corporation, a limited liability company, a limited partnership, or a general partnership. “A general partnership, the liability of each partner for partnership debts is unlimited. Thus, these partners are at risk for more than the amount of their capital investment in the partnership.” In fact, one of the original investors, Mike wants to become a passive investor in CTC and does not liable for all partnership debts. The choice of a general partnership entity is not suggested to CTC, because it is not meet the requirement of its investor. “A C corporation is subject to double taxation. Its earnings are taxed first at the corporate level when earned, then again at the shareholder level when distributed as dividends.” It means that the business will be costlier to start than other business entities. Section 351 governs whether transfers to a corporation are tax-free or taxable. “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in