MEMORANDUM
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School
University of Houston *
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09
Subject
Law
Date
Feb 20, 2024
Type
docx
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2
Uploaded by ProfessorOtterPerson1284
MEMORANDUM
To: Renella
From: Date: October 9
th
, 2023
Subject: Choice of Business Form
Dear Renella: Thank you for contacting us for advice on business tax form. According to the information you provided, we would like to advise you on the most effective business form for the short run. I recommend considering S Corporation as the most beneficial business form. S-Corp is a pass-through entity which means that business profits and losses pass through to your
personal income tax return. Since you mentioned that your business is expecting losses in the first few years, the S-Corporation form will allow you to offset the business’s losses against your
other income. Hence, it will help to reduce your overall tax liability.
As a sole owner of the business, protect your personal wealth is important. S-Corporation provides limited liability protection, so your personal assets will not be affected by the business debts and liabilities. Another advantage of S Corporation is the self-employment taxes. S Corporation owners can potentially reduce self-employment tax liability by paying themselves a “reasonable salary”, which can be deductible on you FICA taxes. Finally, considering your active involvement, expected short-term losses, and potential long-term
profit, an S Corporation will be a great choice for your business short term run. It will allow you to reduce tax liability while safeguard your personal assets. I hope this information can assist you in electing your business form. Please feel free to contact me if you have any further questions. Sincerely,
To: Shirley and Clarence
From: Date: October 9
th
, 2023
Subject: Choice of Business Form
Dear Shirley and Clarence:
I received a request for some advice on which business entity you should choose for your florist shop. You want to operate your florist shop as either a partnership or an S Corporation. After paying salaries of $100,000 to each of the you, the profits are projected to be about $150,000. The earnings are intended to invest in the growth of the business. When selecting a business form, it is important to consider both tax and non-tax factors. The tax factors of partnership and S-Corporation are similar. They are both “passed through” entity which means the earnings and losses are passed through to the partners or shareholder. In both forms, the salary of $100,000 is included in your gross income. The $200,000 will be deducted in
calculating taxable income for partnership or S-Corporation. Moreover, the $150,000 projected floral earnings will be allocated into your gross income.
However, there are non-tax factors that create the differences between partnership and S-
Corporation. If your business conducts as a general partnership, you will have unlimited liability.
In contrast, the S-Corporation have limited liability. Even though you may require guaranteeing corporate debts as a shareholder in S-Corporation, the corporate form is still better in term of safeguarding your personal assets against liabilities. In conclusion, I would recommend the S-Corporation for your florist shop since it will protect you from business debts and liabilities. Yet, you may also want to consider the limited liability company (LLC) form. This business form provides you the same tax consequences as S-
Corporation, but it has more flexibility than S-Corporation form. Please feel free to reach out if you have any further questions or need more information. I am here to assist you in choosing the best solution for your florist shop.
Sincerely,
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