Question

You are an enrolled agent with a new tax client Annika Popova. Annika is starting a new business and wants to know what entity structure might be good for her business. She will be the only owner, but in the future, she may want to add partners. (It takes place in the United States.)

Annika wants to know about the tax advantages for the business entities and which type of entity would limit her liability.

1. Discuss all advantages and disadvantages of each of the business entities you learned about in this lesson.
2. Identify which entity would fulfill Annika's requests.
3. Provide evidence to support your choice using your two required sources.

Answer 1

Annika can structure the business as a Sole Proprietorship to start with since she would be the sole owner.

From a tax perspective it will not be considered and taxation will be in Individual basis.It is a very economical to form and easy to dissolve.There are no tax aspects.Besides basic book keeping no other formality to be complied with,Disadvantage is that libilities are considered as personal liabilities of owner and are not limited.

Once she decides to bring in a partner she can form a Partnership structure.Here the tax is like a pass through in the sense that it Partnership is not taxed but Partners are.Partners can strategically design agreement to reap maximum tax benefits.Contributions to and distributions from a Partnership can be done without tax implications.

Under this form there are following options -

General Partnership - The most basic form wherein sharing of asset and liabilities among partners takes place.Partners are jointly as well as seperatly liable without any limit.

Limited Liability Partnership - Herein one or more partner is a General partner running the operations and his liabilities extend beyond contribution whereas for other partners liability is limited to the extent of contribution.With registration even the liability of General partner can be limited.

Annika can also go for a Limited Liability Corporation structure in future which is a hybrid nature have a mix of features of Partnership and a Corporation.Lianility is limited and profits and losses are assessed to partners.It is a highly flexible structure.