Question

The goal of this exercise is to demonstrate your understanding of the characteristics that influence the choice of business ownership formation.

RT Taxes: After years of preparing taxes for his extended family, Ronald began a tax consultant business from his home office. He hires assistants as needed but does all of the management and main services himself.

Pet Perfect: John with an expertise in sales, and Francine, with an expertise in management, opened a pet shop together, sharing profits and responsibilities equally.

I Scream Inc: A group of friends began an ice cream factory. Because there was a certain amount of risk in whether it would succeed, the friends didn't want to lose their homes over it-plus they wanted to help those with startup costs to have a share of the profits.

Joypass Inc: Samantha, Fabian, and Jonah had a brilliant idea for an online game portal. As a startup, they wanted to retain earnings to survive the initial years, have limited liability should it not succeed, and appear credible when doing business with others.

Drs. O'Reilly: Dr. John O'Reilly and Dr. Sharon O'Reilly decided to open up a practice together after many years working at the hospital. They wanted protection for their personal assets in case of malpractice but wanted to avoid the complexity of traditional incorporating.

Individual Tax Rate: The owner of this organization pays income taxes at an, "individual rate," normally lower than a corporate rate. He or she benefits from tax-exempt accounts for retirement and profit sharing.

No Corporate tax: The owners of this organization pay income taxes on the profits of an individual basis, but the organization does not pay the taxes directly.

Double taxation: Since this organization's profits are taxed at the corporate level and again at the individual level when the dividends are distributed to shareholders, this income is actually taxed twice.

Owners taxed at individual rate: This organization is taxed like a partnership, with owners paying taxes at the individual rate.

Taxed like a partnership: Owners are often called members and pay taxes on income as an individual.

Select from the list below the most appropriate type of business ownership for each company and  taxation type listed above. Note that one taxation type is appropriate to two different types of business ownership.

-Sole proprietorship

- Partnership

-Corporation

-S Corporation

-LLC

Answer 1

RT Taxes: After years of preparing taxes for his extended family, Ronald began a tax consultant business from his home office. He hires assistants as needed but does all of the management and main services himself.

Ans: Sole proprietorship

No Corporate tax: The owners of this organization pay income taxes on the profits of an individual basis, but the organization does not pay the taxes directly.

Explanation: The business and owner are legally the same. The income assets and liabilities of the business are directly belonging to the business owner. Here Ronal is a sole proprietor.

Pet Perfect: John with expertise in sales, and Francine, with an expertise in management, opened a pet shop together, sharing profits and responsibilities equally.

Ans: Partnership

Owners taxed at an individual rate: This organization is taxed like a partnership, with owners paying taxes at the individual rate.

Explanation: The business and owners are legally the same. The two individuals here John and Francine will share management and profits. Income tax for partnership is taxed to the individual partners at their tax rates.

I Scream Inc: A group of friends began an ice cream factory. Because there was a certain amount of risk in whether it would succeed, the friends didn't want to lose their homes over it-plus they wanted to help those with startup costs to have a share of the profits.

Ans: C corporation

Double taxation: Since this organization's profits are taxed at the corporate level and again at the individual level when the dividends are distributed to shareholders, this income is actually taxed twice.

Explanation: It is the best option for a corporation selling products. Taxes are filed at the corporate level. Tax on corporate income is paid at the corporate level than at an individual level on dividends.

Joypass Inc: Samantha, Fabian, and Jonah had a brilliant idea for an online game portal. As a startup, they wanted to retain earnings to survive the initial years, have limited liability should it not succeed, and appear credible when doing business with others.

Ans: S corporation

Individual Tax Rate: The owner of this organization pays income taxes at an "individual rate," normally lower than a corporate rate. He or she benefits from tax-exempt accounts for retirement and profit sharing.

Explanation: a corporation with less than 100 shareholders. They have benefits of incorporation while being taxed as a partnership.

Drs. O'Reilly: Dr. John O'Reilly and Dr. Sharon O'Reilly decided to open up a practice together after many years working at the hospital. They wanted protection for their personal assets in case of malpractice but wanted to avoid the complexity of traditional incorporating.

Ans: LLC

Taxed like a partnership: Owners are often called members and pay taxes on income as an individual.

Explanation: LLC or a limited liability company gives you benefits of a corporation without the complexity. The owners are not personally liable for companies debts or liabilities. There is no need to pay a corporate tax return. LLC owners report their share of profit or income on their individual tax returns. They can avoid double taxation.