Rondo and his business associate, Larry, are considering forming a business enti
ID: 2381144 • Letter: R
Question
Rondo and his business associate, Larry, are considering forming a business entity called R&L but they are unsure about whether to form it as a C corporation, an S corporation or as an LLC. Rondo and Larry would each invest $93,000 in the business. Thus, each owner would take an initial basis in his ownership interest of $93,000 no matter which entity type was formed. Shortly after the formation of the entity, the business borrowed $38,000 from the bank. If applicable, this debt is shared equally between the two owners.
After taking the loan into account, what is Rondo's tax basis in his R&L stock if R&L is formed as a C corporation?
After taking the loan into account, what is Rondo's tax basis in his R&L stock if R&L is formed as an S corporation?
After taking the loan into account, what is Rondo's tax basis in his R&L ownership interest if R&L is formed as an LLC?
Rondo and his business associate, Larry, are considering forming a business entity called R&L but they are unsure about whether to form it as a C corporation, an S corporation or as an LLC. Rondo and Larry would each invest $93,000 in the business. Thus, each owner would take an initial basis in his ownership interest of $93,000 no matter which entity type was formed. Shortly after the formation of the entity, the business borrowed $38,000 from the bank. If applicable, this debt is shared equally between the two owners.
Explanation / Answer
a. After taking the loan into account, what is Rondos tax basis in his R&L stock if R&L is formed as a C corporation?
$93,000. C corporation shareholders do not include entity debt in the tax basis of their stock in the corporation.
b. After taking the loan into account, what is Rondos tax basis in his R&L stock if R&L is formed as an S corporation?
$93,000. S corporation shareholders do not include entity debt in the tax basis of their stock in the corporation.
c. After taking the loan into account, what is Rondos tax basis in his R&L ownership interest if R&L is formed as an LLC?
$112,000 ($93,000 + $19,000).
The owner of an LLC includes his share of the LLCs liabilities in his ownership interest. Here Rondo includes $19,000 in his basis (his share of the $38,000 LLC debt)
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