Bill and Kerry plan to open a limo service for the Miami Dade area after they bu
ID: 2420857 • Letter: B
Question
Bill and Kerry plan to open a limo service for the Miami Dade area after they buy and renovate two 15 passenger vans purchased recently at an auto auction in Delray Beach, Fl. Bill is a licensed commercial driver, but is not knowledgable on business formations, and Kerry has experience as a bookkeeper. Kerry plans to keep her current job with Sunshine foods, inc. but will moonlight with the company when necessary. Their initial projections are that they will lose $35,000 in 2014. They have also paid cash for the two commercial vans ($10,000 each) and had to pay $1,000 to the port of Miami to receive a commercial permit valid through 7/31/2015. To fund operations so far Bill has taken out a second mortgage on his personal residence for $70,000 and deposited the full amount into the company's bank account. Kerry has not contributed any money to the company, but has offered to work on the company's accounting books for 'free' until a point in time when the company has enough money to pay her. a. List advantages for operating this business as a partnership instead of a corporation and state your recommendation as their CPA for business entity formation including % allocation if your advice is a partnership (please also state whether you believe they should set up as a general or limited partnership in your opinion) b. As the CPA for Kerry and Bill, what will Bill and Kerry recognize for taxes, assuming they accept your recommendation for entity formation as stated in part A in 2014?
Explanation / Answer
Advantages of Partnership:
1. It is very easy and simply to start partnership business rather than corporation which require cumbersome legal requirements i.e preparation of Memorandum of Association and Articles etc.
2. Partnership business do not pay any tax on business, but partners will pay tax on their salaries, dividends etc. where as in corporation, tax will be paid by corporation
3. In Partnership, all general partners decide how to run the busines, where as in corporation, shareholders should conduct regualar meetings to elect their management and policies.
4. Cost of starting partnership business is very low than corpration whcih require to pay hevvy fee to the government to register its business
They share the profit and losses equally as they do not have any formal agreement to share profits & losses. Eveny if kerry not invested any amount, she is entitled to share equally
b. No gain or loss is recognised when partners contributed any asset to the entity to get partnership interst. Their business also not required to pay tax on gains rather partners pay tax on their income derived from partnership. In the above case Blll contributed $ 70,000 to partnership on which he has no need to pay tax.
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