Question

A wealthy taxpayer is planning to start an online business. The taxpayer expects to generate tax losses for at least the first 5 years of the business. The taxpayer also hopes to cash out of the business within 10 years by going public or selling to another business.

• List one pro and one con of starting the business out as a C Corporation
• List one pro and one con of starting the business out as a Sole Proprietorship
• List one pro and one con of starting the business out as a Pass Thru Entity
• What impact will the pro or con have on the investors ability to cash out of the business?
• What impact will the pro or con have on the investors ability to sell to another business?
• What tax impact, if any, will the entity choice have on either of these events? Be specific.

Answer 1

Answer:

The sole proprietorship is a simple form of business that can be operated just by a single person. There is no legal distinction between the owner and the business in case of sole proprietorship. It simply refers to a person who owns the business and is personally responsible for its debts.

On the other hand, a corporation is considered as a separate legal and tax entity, and they are mainly three types of corporation:

• Limited Liability Corporation (LLC)
• S-Corp
• C-Corp.

The LLC or the S-Corp are both good options if the business has just started, these can also be termed as pass through business, because all of the company income passes through to the owners as personal income which is taxable. But, if the corporation loses money, than deduction to personal taxes of the owners can be claimed. This can be helpful when the business has just started and expect a loss for the first year or so.

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The standard corporation, or C Corporation, It is a separate legal entity owned by shareholders. The corporation is formed by incorporation documents and has to pay the related filing fees. The structure of a C Corporation limits each owner's personal liability for the companys business debts to the amount invested in the company by the shareholder.

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While a business conducted as a sole proprietorship does not provide limited financial liability to the owners, these entities have an advantage over the corporation in the case of double taxation issues; the Corporation has to pay dual taxes, their personal income tax and the tax of the business, while sole proprietorship business has to pay just one tax.

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(a) The business should be sold through the IPO route because the company will improve its financial condition by obtaining money that does not have to be repaid also the Stock in the company can be used in part to finance acquisitions of other companies which would fuel growth and expansion and would make it a larger entity. However if the owner is not wealthy than he should sell the business to other company as going IPO involves huge cost, he has to pay to the Investment Bankers, regulatory fees and other minimum capital requirement to float in the market.

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(b) It does matter to a point because getting involved in the operations would allow the investor to get an insight of the business and would be able to make more rational decision in the future course of the business. However the being wealthy would not make any impact in this case.