Week 4 Project

2

Memo on U.S Tax System

Valery Salazar

Keiser University

Corporate Business, and Trust Tax

Gregory Gosman

February 17, 2023

MEMO

To: Our Valued Client

From: Tax Professional

Date:21/2/2023

Re Legal Entities Recognized by the US Tax System

Introduction

As your tax advisor, I have looked through your current setup as a sole proprietorship and would like to give you a rundown of the legal entities allowed by the US tax system and the key distinctions between them. Furthermore, I will cover the pros and cons of switching from being a single proprietor to becoming a corporation. Lastly, I will discuss the norms and practices that underpin professional ethics in the context of corporate, commercial, and trust taxes.

Legal Entities and Their Characteristics

The US tax system recognizes four distinct types of legal entities;

1. Sole Proprietorships

2. Partnerships

3. Corporations

4. Limited Liability Corporation (LLC)

Sole Proprietorship: A sole proprietorship is a business owned and operated by a single person. To whatever extent a firm incurs debt or liability, such debt or liability is ultimately the owner's responsibility. The proprietor's tax return is where the company's earnings and losses are detailed (Pfeifer & Yoon, 2019).

Partnership: When many people share company ownership, it is called a partnership. Each partner has individual responsibility for the company's debts and obligations. Partners must include partnership income and losses on tax filings (Greenman et al., 2021). A partnership is company ownership and management in which two or more individuals work together to run the show on Florida business. There are many distinct kinds of partnerships, such as general, liability, and limited liability partnerships. The partners must pay any debts or liabilities, and any profits or losses must be included in the partners' individual tax filings (Lidstone, 2021).

Corporation: When its stockholders form a company, it becomes a distinct legal entity. A shareholder's liability is limited to the amount invested in a company, whereas the business is accountable for its debts and obligations. A company's legal structure consists of a board of directors, officials, and shareholders and may issue shares to provide financial backing.

Limited Liability Company (LLC): LLCs are special business organization that incorporates the advantages of corporations and partnerships (Hatfield, 2019). A limited liability company (LLC) functions similarly to a corporation in that its owners are shielded from legal responsibility for the debts and actions of the business while still being taxed as a partnership.

Advantages and Disadvantages of Changing from Individual Ownership to Corporate Structure.

There are positive and negative aspects to transforming a single proprietorship into a corporation.

Advantages:

· Limited liability protection: As a general rule, a shareholder's assets are shielded from the debts and liabilities of a company because of the limited liability protection afforded by the entity's structure.

· Ability to raise capital: Stock offerings are popular for corporations to generate finance, especially when expanding their operations.

· Tax advantages: Healthcare insurance, like other employee benefits, may be deducted by a business, and tax rates for corporations can be lowered.

Disadvantages:

· Increased complexity and cost: Compared to a sole proprietorship, operating a corporation involves more paperwork, legal expenses, and regular upkeep. It might also need more staff to deal with the ensuing influx of work.

· Double taxation: To put it another way, a company's earnings are taxed twice: once by the business itself and once by the shareholders who own its shares.

· Less flexibility: Corporations have less leeway than single proprietorships since they must adhere to additional formalities and rules.

Ethical Principles and Professional Conduct Linking to Corporate, and Trust Taxation

As a tax advisor, I have vowed always to act professionally and ethically while dealing with client matters, including business, trust, and corporate taxes. This includes telling the truth, not misleading others, avoiding conflicts of interest, and following all relevant laws and regulations.

Conclusion

In summary, In the United States, there are four distinct types of legal entities, each with its own set of benefits and drawbacks for tax purposes. Limited liability, access to financial markets, and favorable tax treatment are some benefits that may be gained by transforming a sole proprietorship into a corporation.

Sincerely,

Tax Professional

References

Greenman, C., Esplin, D., Johnston, R., & Richards, J. (2021, July 7). Understanding Ethics in the Varying Segments of the Accounting Profession. Papers.ssrn.com. https://ssrn.com/abstract=3882222

Hatfield, M. (2019). Professionally Responsible Artificial Intelligence. Arizona State Law Journal, 51, 1057. https://heinonline.org/HOL/LandingPage?handle=hein.journals/arzjl51&div=33&id=&page=

Lidstone, H. K. (2021). LLC or Inc.? Entity Selection for a Small Business. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3938182

Pfeifer, M. G., & Yoon, S. J. (2019). IRS weapons against aggressive tax planning1. Trusts & Trustees, 25(1), 69–74. https://doi.org/10.1093/tandt/tty170