Because of your background as a student CPA, two of your long-time friends recen

Question

Because of your background as a student CPA, two of your long-time friends recently approached you for guidance concerning a new business venture they plan to form. They expect the business to generate a loss of approximately $50,000 during its first year of operations, and profits close to $100,000 annually thereafter. Both individuals will be active participants in the business. They want to know what type of entity to choose: a C corporation; S corporation; or a Partnership. Choose one of these three entity types above as your recommendation (LLC is not a choice) and support your answer, stating the advantages and disadvantages of that entity. Include in your discussion how the first-year loss and subsequent years’ income generated by the business will affect the business associates’ personal taxes. If you make any assumptions about the business, please indicate. There is no right or wrong answer.

Explanation / Answer

Partnership – a partnership business is formed by an agreement between two parties where they share the profits and losses of their business in pre defined ratios.

Advantages

Disadvantage

Corporation – a corporation is a group of people who are authorized to act as a single entity that is a company which are recognized as such in law (Medina, 1988).

Advantages

     Disadvantage

The best option available in this case is the formation of a corporation. The incorporation and maintenance cost will be low in this case and the corporation can be easily formed. Corporation will not thrust the burden of any personal liability. Also, in the case of corporation there will be a set off of loss that can be carried forward for the next years.

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