Amy, Bob, and Carol want to discuss forming an S corporation instead of a partne

Question

Amy, Bob, and Carol want to discuss forming an S corporation instead of a partnership to operate a marina in Florida. They wish to have equal ownership in the business entity. Amy can contribute $400,000, and she is a boat mechanic. Bob has management expertise in running a marina, and he has five acres on the Intracoastal Waterway that he can contribute. Carol has experience running an office, and she has $300,000 in cash and office furniture and equipment worth $50,000. The three partners in this endeavor are interested in providing health insurance, life insurance, and dental insurance for each owner.

**REQUIRED**

In your report, explain whether there are any tax advantages of having the business provide employee benefits for owners as well as other employees. What are some options that should be considered to fairly compensate each of the owners for what they are contributing and for the work they will do running the business?

Explanation / Answer

S corporation is limited liability form of business which can be formed by less than a hundred individuals. It has the following tax advantages to the owners as well as well as other employees; the owners are not taxed twice like the case with a purely partnership business, S corporation income is not in taxed Florida giving it a double tax advantage. It is only the dividends paid to the shareholders which are taxed at a withholding tax. The benefits like life insurance provided by the corporation are taxed deductible and are therefore deducted when calculating the taxable income for the corporation. The medical insurance premiums paid on behalf of the shareholders or employees will qualify as expenses which are allowable when computing taxable income for the corporation. The corporation that provides its employee with the employee stock compensation plan will have the benefits of capital gains which are not taxed now but can be deferred until the organization is able to pay hence can venture into other businesses at present and make profits for the business. Also the costs that the business incur when providing the employees with some benefits are considered as expenses hence deductible either as fixed expense or variable expenses. Furthermore, providing certain fringe benefits to the employees is tax allowable for an S corporation like corporations’ cars given to employees. Florida does not tax the S-corporations on their income taxes thus guaranteeing tax benefits for the S corporation wishing to start a business. The corporation will get tax advantages by providing its employees with employee compensation in case of an accident since they are allowable expenses.

The owners of the business should be given enough dividends that will enable them to appreciate the activities of the corporation. This make them to view the business positively and provide their maximum support. They should also be given the position of directorship in the management so that they are able to contribute to the critical decisions made for the company progress and growth hence feel part and parcel of the corporation. The provision of the right issue to the owners so that they can increase their ownership value in the business. The owners could also be given dividends twice a year, that is the interim and the final dividends to help them in expanding other businesses. The business to sell shares to the owners at a discount as compared to selling to new shareholders which should be at a premium. The owners should be given first priority when choosing shareholders when the corporation opens a subsidiary.

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