Stephanie and her husband, Richard, intend to purchase an historic house, renova

Question

Stephanie and her husband, Richard, intend to purchase an historic house, renovate it and then use it as a therapeutic massage clinic. To do this, they need $300,000 in financing in addition to using money from their personal savings. They expect the business to operate at a loss for the first two years. Until the clinic becomes profitable, Richard will continue to work as a full-time professor at the local university where he earns a substantial salary. Stephanie will work evenings and weekends in her existing landscaping business, which she runs as a sole proprietor Stephanie and Richard are concerned about protecting their other assets in the event the business should fail and the bank forecloses on their business loan. They would also like to minimize their current personal income taxes. Considering these objectives and the unproven nature of their business, what statement is true? o They should operate the business as a general partnership, so they can deduct the losses from their o They should establish a 2-person limited liability partnership, so they can flow through the losses o They should operate the business as a corporation because it will protect them from liability, even if o They should operate the business as a corporation because they will be able to deduct the losses other sources of income during the business start-up years. while protecting themselves from personal liability the bank requires them to personally guarantee the loan. from their other sources of income and their personal assets will not be put at risk in the event of business failure

Explanation / Answer

4th choice/statement is true i.e They should operate the business as corporation because they will be able to deduct their losses from other sources of income and their personal asset will not be put at risk if business fails. This is correct because it gives dual benefit of deducting their losses from startup years as well as protect them fromselves from personal liability in the event of business failure. The other choices does not give the same benefits

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