Question

On January 1, 20X1, Adams and Ballard form Entity X. Adams contributes Stock A with a basis of $200,000 and a value of $100,000, and Ballard contributes cash of $100,000. On January 31, 20X1 Stock A is sold for $200,000.

Questions:

a) What are the tax consequences to Adams and Ballard of the sale of Stock A if Entity X is a limited liability company?

b) What are the tax consequences to Adams and Ballard of the sale of Stock A if Entity X is an S-corporation?

Answer 1

Adama and Ballard tax consequences for the two situations:

Explanation:

a) If Entity X is a limited liability company, the sold stock will then be considered as the sales revenue of $200,000 and the cost of the sales based at $100,000. Since the business is registered as a limited liability company, the income or profit of $200,000 - $100,000 = $100,000 will be taxed using the corporate tax rate to determine the net profit. After determining the net profit, Entity X will declare dividends payment to Adams and Ballard. The paid dividends to Adams and Ballard will also be taxed at their personal income taxes.

b) If Entity X is an S-corporation, the income earned will be divided between Adams and Ballard then taxed at their personal income tax rates. S-Corporations do not pay taxes hence there will be no tax liability at te entity level. The realized profit of $100,000 will be divided between the two and taxed at individual tax rates after they have added the shared income to their other taxable income.