Entity Selection Essay

Facts later on 20+ years of working for other firms, genus genus Penelope (enrolled agent, age 41), Mark (CPA, age 43), and John (CVA, age 65) want to get out the firms they are currently employed by and become their own bosses. Penelope specializes in revenuees, Mark is the auditor, and John is a vexation valuation expert. at that place are so m all options in stock(predicate) as to how they whoremonger organize the tonic moving in. The appropriate cable entity for any individual(s) allow for depend on their particular particulars and muckle. You are a valued colleague and friend of this three roughly, and they nourish come to you seeking advice as to how to expression their new business. They lose the association to figure it out themselves but are looking for the advice of an artless leash party. Please consider the following assess and non measure considerations as you recommend an entity picking to Penelope, Mark, and John. rive I debate the various sorti ngs of organization that are avail equal to(p) to Penelope, Mark, and John. In general terms, the entity that you give be choosing pass on be some form of partnership. In broad definition, a partnership is defined as a single business where two or more pot helping self-will, with individually partner bringing specific roles to the business. Since for for individually one one appendage of the partnership will be taking on specific functions and obligation with the partnership, it is extremely important that all agree on the specific body organize that the partnership will take. The purpose of this memo is to provide an educated and unbiased opinion on what structure that partnership should take. violatenerships are commonly organised as General fusions, Joint Ventures, or hold in Partnerships (limited liability).For the purposes of this memo, we will hold fast to forms of Limited Partnerships as the current economic climate necessitates a business structure that lim its the liability of its owners. Common forms of Limited Partnerships are Limited indebtedness Partnerships (LLP), Limited financial obligation Company (LLC), S Corporations (S Corp), and C Corporations (C Corp). Limited indebtedness Partnerships (LLP) are similar to generalpartnerships with the exception that they allow two classes of partners those with mount management control and those with no personalised interest or liability beyond their enthronement (1). On the other hand, a Limited indebtedness Company (LLC) is a flexible form of business arrangement that melds characteristics of both partnerships and corporate structures. It is technically not a confederation, but a levelheaded form of business entity that provides limited liability to its owners. for distributively one owner in an LLC is considered a genus Phallus, with mesh and losses being passed through and through to their personal tax returns (2). An S Corporation (S Corp) is a type of corporation that is c reated through a special tax election.This election is beneficial when it comes to avoiding double- tax revenue. If a business is able to meet the S Corporation criteria, it will be able to reap the primary advantage of an S Corp which is tax savings. This is collect to the fact that an S Corporation allows its employees to take a reasonable salary, constrictive the income subject to income taxes and saving the rest of the corporations profits to be taxed at a lower rate as a dispersal (3). Finally, a C Corporation (C Corp) is a separate legal structure formed for a business, protecting ownership and their personal assets from judgments against the company. It is a a great deal more time consuming process to form a C Corporation, as the structure must include constituentholders, officers, and directors. Often times, the drawbacks of double taxation and administrative issues cause small business owners to seek other alternatives (4).Part II Make your recommendation as to what f orm of organization you bank will be best, and be sure to explain the reasoning for your choice. After careful consideration, it is my opinion that the best business structure for your new back would be to form and Limited liability Company (LLC). This structure will provide the company with adequate protection while also establishing safeguards for individually element and his or her personal assets. In this arrangement, each member will be removed from the consequences that could result from another members error or negligence. I place particular emphasis on this fact because I know that all three of you are personal friends extraneous of the work environment, and I do not want there to be hesitation on anyones part regarded the business for fear of negativethe friendship.In addition to the advantages named above, the LLC will allow each member to have intelligibly defined roles and management duties, as well as clearly defined ownership stakes and ploughshares of profits and losses. As we will establish in the coming sections, the formation of the in operation(p) Agreement for the LLC will assistance to clearly establish these roles, allowing each of you to focus solely on your feeling of the business and allowing it to run as smoothly as possible (5).Part III discuss the tax consequences of change cash, property, and/or services to the new entity. Ordinarily, there are no tax consequences on contributions of property or services to a Limited Liability Company. Typically, members can utilize the tax treatment provided by IRC Section 721(a) when it comes to the contribution of property to an LLC. This section areas that no loss or gain shall be to the partnership or any of its members in the case of contribution of property to the partnership in transfer for an interest in the partnership (6). However, there are exceptions to this rule, particularly when the contribution is an attempt to disguise the sale of property to avoid taxation. In th ese circumstances, the contributing member would have a taxable gain when the sale is faultless (7). Cash contributions have similar treatment. They are given in win over for ownership interest, and as a result, they are not taxable.Part IV Discuss, in detail, how this entity is taxed (if at all) and what filing requirements it has with the IRS. Assuming you will not be making an election to be treated as a corporation (this would require becoming an S Corp or C Corp) the Limited Liability Company will be treated as a partnership. In other words, the LLC is treated by default as a pass through entity, meaning each member will be responsible for his or her portion of the profits on their personal income taxes. all told partnerships are required to file Form 1065 with the IRS.This form is the U.S. Return of Partnership Income and it demonstrates the income, gains, losses, deductions, and credits from the operation of the partnership (in this case, the LLC). Each members share of pr ofits will be outlined by the Operating Agreement, which we will discuss further in the next section. Should your LLC decide to split profits and losses in a manner that does not match upwith each members parcel interest, then you will extremity to request a special allocation from the IRS (8).Part V Discuss how income and distributions may or will be allocated to Penelope, Mark, and John. Income and distributions will be allocated to each member through the Operating Agreement. In an LLC, the Operating Agreement allows its members to structure the financial and working arrangements in a way that suits the business and each member. In this agreement, the members establish each owners percentage ownership of the LLC, his or her share of profits and losses, the rights and responsibilities of each member, and what will happen to the business if one member decides to leave (9).It also helps to establish the framework for providing each member with a capital account for their portion o f ownership. For example, Penelopes percentage ownership in the LLC may be defined by the percentage of capital she contributes (be it cash, property, etc.) to the business. In turn, this established ownership percentage can be used to determine what proportion of the LLCs profits she is authorise to receive.Part VI Discuss, in detail, how the individuals are taxed (if at all) with respect to the straighten out profits from this entity and what filing requirements they will each have with the IRS. As mentioned previously, a Limited Liability Company is considered a pass through entity unless it makes a special corporate election to be treated otherwise. By utilizing a Limited Liability Company, you are required to report your individual share of profit or loss from the business on your personal tax return. The Limited Liability Company will provide each member with a Schedule K-1, which demonstrates each members share of income, credits, and deductions for the partnership.Each mem ber is then required to report these amounts for both federal and state taxation on their individual Form 1040 and Schedule E (8). another(prenominal) important note to consider when it comes to individual taxation of Limited Liability Company members is the fact that each member is considered self-employed. As a result, each member must remember to make estimated tax payments for income and self-employment taxes on a quarterly basis. Failure to do so may result in penalties on your personal income tax return (8).Part VII Discuss how Penelope, Mark, and John will calculate their basis in the new entity. Be sure to include the impact that debt has on basis, if any. As previously mentioned, the Operating Agreement will help to determine each members basis in the new Limited Liability Company. In general, the tax basis of a member with an interest in an LLC will be equal to the value of any cash or property the member contributed to the LLC. The value of these contributions is shown on the LLCs balance sheet in the form of capital accounts for each member. IRC Section 752 describes the regulations involved in treating liabilities (debt) with regards to basis or stake in the partnership.Using this rule, any increase in a partners share of the liabilities of a partnership shall be considered a contribution of money by said partner to the partnership (10). With regards to loans make by a member to the partnership, there are special circumstances to consider. While the loan itself will be treated as a contribution and effectively increase the members proportional share of ownership, the member will also be given the treatment of a creditor if the business were to ever be liquidated. Creditors stand a much mend chance of being able to recover a portion of their investment into the LLC than the other members.Part VIII (Limited Liability) Discuss the exposure that Penelope, Mark, and Johns personal assets will have to the debts and lawsuits of the entity you have recom mended. As we have discussed passim this memo, the formation of a Limited Liability Company limits the exposure of its members to their percentage of ownership or equity interest in the company. This protects the members assets in the event of a business related lawsuit or other form of legal action against the company. In other words, each members exposure will be limited to a fixed sum, akin to the value of the individuals investment into the company. In addition, this means that each member will not be personally liable for the debts of the company. This is a key difference between the Limited Liability Company and other forms of General Partnerships, as members who organize their business in the structure of the latter have unlimited liability (11).References1. http//www.entrepreneur.com/encyclopedia/limited-liability-partnership 2. http//www.sba.gov/ sum/limited-liability-company-llc3. http//www.sba.gov/content/s-corporation4. https//www.incorporate.com/c_corporation.html5. h ttp//www.rocketlawyer.com/article/why-start-an-llc-limited-liability-company-advantages-and-disadvantages.rl 6. http//www.law.cornell.edu/uscode/text/26/7217. http//www.alberty.com/newsletter_summer01.html8. http//www.sba.gov/community/blogs/6-things-you-need-know-about-your-tax-responsibilities-llc 9. https//www.nolo.com/legal-encyclopedia/llc-operating-agreement-30232.html 10. http//www.law.cornell.edu/uscode/text/26/75211. http//www.investopedia.com/terms/l/limitedliability.asp