Question

1. A and B purchase unimproved land as cotenants. In each of the following alternatives, determine whether A and B have created an “entity” for tax purposes: a. They hold the land for appreciation; b. They lease the land to Z who uses the land for farming; c. They construct a motel on the land and hire C to manage the motel for them. 2. A, B and C have decided to leave their current positions as software designers in a large company and to start up their own firm. A and B have been very successful and are now quite wealthy. C, on the other hand, is a brilliant young programmer who is still paying off student loans. Although A and B both plan to invest capital in the new firm, they hope to eventually attract additional outside investors. They have come to you for advice in setting up their new venture. What are their options in choosing a business entity, and what considerations should they take into account in making that choice?

Answer 1

1. Since A&B holds a land as cotenants:-

a. If hold for land appreciation then they have not created a tax entity as land is not generating income for them.

b. If they give it on lease then it will become a tax entity for them only if the major objective is of to earn rent which is not in the moa so it will not become the tax entity.

c. If they make a motel over it then it is a pure business and it will be treated as a tax entity.

2.Options while choosing a business entity are :-

a. Sole proprietorship which can not be there as there are 2 people

b. LLC limited liability company

c. Partnership

d. BUSINESS CORPORATION

Factors to be considered are :-

a. Complexity in its formation

b. Control over entity

c.Tax implications

d. Ongoing administration

e. Future capital requirements

so if they want to attract foreign investment they they should start an entity as a company so that it is easy to transfer share Against the investment.