Question

John Payne is the sole owner of a classic car restoration business that specializes in the restoration of classic and muscle cars for individuals. It is not incorporated at this time. John has called his company the GAS MONKEE CAR RESTORATION. John believes there might be an advantage to creating a corporation for limited liability reasons. John has assets to transfer for the stock in Gas Monkee totaling approximately $250,000.00. In addition, he manages Gas Monkee's operations on a full-time basis and pays himself a salary of $80,000.00. John has a key mechanic and restoration specialist employee, Richard Rogers, that he would like to make a shareholder in the new corporation. It is John's intent to be an eighty percent (80%) owner in the corporation and Richard would be a twenty percent (20%) owner. Richard only has cash of Ten Thousand Dollars to invest and would like to substitute his mechanic skills (i.e. services) for the twenty percent ownership. Discuss in detail the relevant issues for John and Richard. Can the new corporation be formed? Would there be tax consequences for either John or Richard? Is there a way to avoid any tax consequences? Do you have any other suggestions for John and Richard from a tax perspective? You must cite in detail, using the IRAC method and Blue Book Method. Answer John and Richard in a double spaced memo, fully citing in detail the Internal Revenue Code in no more than six pages. Emphasis is placed on citing the appropriate code.

Answer 1

Answer:

Issues:

• Regardless of whether the new organization can be framed?
• What might be the tax consequences for either john or Richard?
• What are the approaches to keep away from or avoid tax consequences?

Rules:

• A constrained Liability corporation is a hybrid type of business entity which has selected highlights or features of a corporation and partnership.
• It has been organized in a manner to profit by the go through tax assessment feature of an association alongside allowing flexibility in activity and the management.
• LLC's proprietors are not exhausted as a different business substance .Instead all profits and losses are gone through the business to every individual from the LLC and they will report such profits and losses on their personal tax returns . .
• No restrictions on the number of individuals permitted.
• Individuals have adaptability in organizing the organization management.
• Proprietors are not personally liable for business debts and liabilities..

Analysis :

In the given inquiry

• The number of individuals are two for example John payne and richard.
• John's share is 80% and Richard's share is 20%

Conclusion:

• As there is no limitation on the number of individuals for framing a constrained risk company , consequently jhon payne and richard can shape a LLC.
• As the individuals have adaptability in organizing the organization the management ,john can be 80% investor and richard can be 20% investor.
• The LLC isn't taxed straightforwardly as it isn't viewed as a separate tax entity . Rather all profits ,and losses are passed to every part according to his share and the individuals pay tax on such portion of profits or losses on their personal tax return.