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Homework answers / question archive / One of your best individual clients is thinking about starting up a new business, and he is seeking your advice on which business form he should select
One of your best individual clients is thinking about starting up a new business, and he is seeking your advice on which business form he should select. In particular, he's trying to decide whether to operate the business as a partnership or a C corporation. Explain to him the significant tax and nontax issues that will arise from choosing each of these entities compared to the other, including how income will be treated by the entity, the overall tax burden, and the effect of distributions of property or earnings from the entity to your client. (Note: Do not spend time addressing other types of business entities. Credit will only be given for discussion of the two business entities at issue.)
A partnership is a form of business that is created by two or more individuals. Its formation is relatively simple and often based on an informal agreement between the owners. Partnerships do not pay income taxes. Instead, any profit is split among the partners, each partner handles their portion of taxes due on a personal level. Partnerships do not enjoy limited liability. All partners are responsible for the debts of the organization. If those debts exceed the assets of the partnership, then personal assets of the partners may be used to satisfy them. Partnerships end with the death of a partner.
A C corporation is its own separate entity with specific criteria for formation. Ownership of a C corporation is with stockholders, but daily operations and decisions are handled through a chosen board of directors. Taxation of a C corporation lies with the corporation itself, and not with the individual owners. Since a C corporation is an entity on its own, the entity itself is fully responsible for all debts. Owners of the corporation have limited liability, meaning that the amount of liability owners can be held accountable for cannot exceed the amount of the stockholders investment. The death of a stockholder does not cause the end of a corporation.