Date: December 8, 2013
Subject: Entity Selection
Facts: After 20+ years of working for other firms, Penelope (enrolled agent, age 41), Mark (CPA, age 43), and John (CVA, age 65) want to leave the firms they are currently employed by and become their own bosses. Penelope specializes in taxes, Mark is the auditor, and John is a business valuation expert.
There are so many options available as to how they can structure the new business. The appropriate business entity for any individual(s) will depend on their particular facts and circumstances.
You are a valued colleague and friend of this threesome, and they have come to you seeking advice as to how to structure their new business. They have the knowledge to figure it out themselves but are looking for the advice of an unbiased third party. Please consider the following tax and nontax considerations as you recommend an entity choice to Penelope, Mark, and John.
Part I: Discuss the various forms of organization that are available to Penelope, Mark, and John.
There are a number of different forms of organizations for Penelope, Mark, and John to choose. The four main ones are a partnership, Limited Liability Corporation (LLC), S Corporation, or C Corporation.
In a partnership all partners are personally liable for debts and obligations. Each partner claims their share of income and losses on their individual tax returns. An LLC covers the owner from personal liability from business debts. As with a partnership, the taxes for an LLC are passed through to the owners. An S Corporation, as with an LLC, the income and taxes pass through to the owners. C Corporations are considered separate entities and pays corporate income taxes separate from the shareholders. With a C Corporation, the shareholders are also taxed on the dividends received.
Part II: Make your recommendation as to what form of organization you believe will be best, and be sure to explain the reasoning for