Question

Allie and Austin have operated a small florist business from their garage at home as an
informal business for the last three years. After some deliberation, they have decided to make
their business formal. They approach you, as a management consultant, to assist them in
selecting the most appropriate form of business organization. You have established that both
would like to minimize their tax liability. Advise Allie and Austin on the most appropriate legal
form of business organization based on this requirement. Provide a brief outline of the strengths
and weaknesses of the legal form of business organization recommended. What other legal form
of business organization would you recommend they consider? What would be the motivation
behind this recommendation?

Answer 1

S Corporation

​​​​​​I would recommend them to form the s corporation i.e. small business corporation. It is the best option fo4 tax planning. The profits will be divided in two portions in this organisation, 1. Self employment income and 2. Dividend.

This business separates itself with its owners, they work like the employees of the company. Hence they get salary.

The tax is given only on self employment income not on dividend unlike LLP they have to give tax on whole amout of profit that have generated.

STRENGTHS

1. Double tax is avoided.
2. Limited liability.
3. Tax returns will be once in a year only.
4. Can raise capital by selling shares.

WEAKNESSES

1. Limit on no. of shareholders, only 75 shareholders can be there, maximum up to 100.
2. Excessive Formalities i.e. book keeping, payrolls
3. Social security benefits will get reduced due to reduced self employment tax.
4. Low mortgage retirement contributions

There are many other legal gorm of business but i would recommend them to LLP as second preference.

LLP and s corporations both are tax mitigators. Its profit are considered as self generation income before the distribution of dividend. Its tax amount gets a bit higher than S corporation but they will get benefit over the weaknesses of S corporation.

The motivation behind this recommendation is primarily the tax reduction. By both of the organisation their tax will get reduced than other type of organisations and as they are running the business since 3 years, their income will be on a regular basis. This recommendation will definitely help them in turning into a legal form of business with the utmost reduction of taxes.

​​​​​​