Rondo and his business associate, Larry, are considering forming a business enti

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 $70,500 in the business. Thus, each owner would take an initial basis in his ownership interest of $70,500 no matter which entity type was formed. Shortly after the formation of the entity, the business borrowed $37,500 from the bank. If applicable, this debt is shared equally between the two owners.

a. 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?

b. 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?

c. 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?

Explanation / Answer

a. Rondo's tax basis = $70500

Since the shareholders of C corporation do not include entity debt in the tax basis of their stock in the corporation.

b. Rondo's tax basis = $70500

Since the shareholders of S corporation do not include entity debt in the tax basis of their stock in the corporation.

c. Rondo's tax basis = $70500 + $18750 = $89250

Since the owner of LLC includes his share of the LLC's liabilities in his ownership interest.

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