Question

Shirley and Clarence Fortune are going to operate their florist shop as a partnership or as an S Corporation. After paying Salaries of $100,000 to each of the owners, the florist shop's annual earnings are projected to be about $150,000. The earnings are to be invested in the growth of the business. Prepare a memorandum identifying as to which of the two (2) entity forms that Shirley and Clarence should select (considering both Tax and Nontax Factors).

Answer 1

Shirly and Clarence should prefer S corporation :

1. Personal Asset Protection:  In a general partnership, patners and firm are not a separate legal entity. If the firm goes bankrupt or is sued, patners personal assets are used to pay off the claims.
   In a S-corp, shareholders and company are separate legale entity, and personal assets of shareholders are not attached to the comapny to pay off debt.

2. Pass-Through Taxation: S corp is similar to patnership as both offer pass-through taxation benefit. Double taxation is avoided by charging tax only once at company level. The remaining profit is apportioned to the patners. Unlike C corp where profits are first taxed a corporate tax level and then taxed to shareholders once distributed

3. Employment Taxes: In patnership, general patners pay income tax and self-employement tax on profits they recieve and limited patners how thier income as passive income which is subject to "self-employment tax" unlike active patners.
   In an S corp, company has to pay an industry acceptable standard of income and is shown as a business expense. Any profit divided post this is shown as passive income and not subject to self employment tax. Active shareholders thus have a significant tax advanatage in S corp provided there is enough revenue to pay the industry standard waged and still show profits.