Tax Benefits And Liability For S Corporations

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Running Head: TAX BENEFITS AND LIABILITIES 1

Tax Benefits and Liabilities

Name

Instructor

Institutional Affiliation

Date

TAX BENEFITS AND LIABILITIES 2

2 | P a g e

Memorandum

Recommendation on a type of business entity for the client to consider based on tax

research.

Incorporating his business as an S-corporation may be a good idea for him. This form of

business will ensure that the family business is limited to the close persons which are a good idea

for a small startup business. This also comes with tax advantage if internal revenue service (IRS)

code requirements are met. This gives the business amnesty on paying corporate taxes as it is

waived and reported by owners on their personal or individual federal income tax returns thus

avoiding double taxation as is seen in regular corporations (Grubert & Mutti, 2000). This is

because taxation of S corporations resembles that of partnerships.

Justify whether or not the client should choose a business entity that has limited liability

protection.

The person should consider having limited liability protection to avoid his other

investments from being frozen and used in the event the business becomes insolvent or bankrupt.

This will protect him with his other wealth. It is also this limitation that will inspire desire to

have the business prosper and thrive as a separate entity from the owner as finances are

“separated”. The owners only get rewarded in form of dividends and salaries when they provide

services to the business. This allows the business plough back some money for its growth. Actual

distributions of funds, as opposed to distributive shares, typically have no effect on the

shareholder’s tax liability (Brajcich & Lawson, 2013).

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Running Head: TAX BENEFITS AND LIABILITIES Tax Benefits and Liabilities Name Instructor Institutional Affiliation Date 1 TAX BENEFITS AND LIABILITIES 2 Memorandum Recommendation on a type of business entity for the client to consider based on tax research. Incorporating his business as an S-corporation may be a good idea for him. This form of business will ensure that the family business is limited to the close persons which are a good idea for a small startup business. This also comes with tax advantage if internal revenue service (IRS) code requirements are met. This gives the business amnesty on paying corporate taxes as it is waived and reported by owners on their personal or individual federal income tax returns thus avoiding double taxation as is seen in regular corporations (Grubert & Mutti, 2000). This is because taxation of S corporations resembles that of partnerships. Justify whether or not the client should choose a business entity that has limited liability protection. The person should consider having limited liability protection to avoid his other investments from being frozen and used in the event the business becomes insolvent or bankrupt. This will protect him with his other wealth. It is also this limitation that will inspire desire to have the business prosper and thrive as a separate entity from the owner as finances are “separated”. The owners only get rewarded in form of dividends and salaries when they provide services to the business. This a ...
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