Running Head: Business entity a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 1
Business entity: Milestone Two – Memorandum
Business entity a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 2
To: Mr Bob Jones
From: Mr Freddy Arguello, Account Associate, ABC Finance Org.
Date: February 23, 2023
Subject: Insight into taxation based on the ideal business entity type
D. Tax effects – In case of withdrawing cash or paying dividends
The decision to provide $ 180,000 annually for the client’s salary and $ 70,000 annually for his
daughter’s salary can give rise to tax-related implications that must be taken into account. Any
kind of disbursement that will be made by the business must be discussed in the Board meeting
since it can impact the tax that will have to be paid by the business. In case salary is paid to the
client and his daughter, the amount is subjected to income tax. Thereby, if $ 250,000 ($ 180,000 +
$ 70,000) is withdrawn from the partnership business for the purpose of paying salary, the
partnership will have to withhold the tax amount and remit it to appropriate authoritative parties in
the taxation department. According to Internal Revenue Service (IRS), each partner of a
partnership business is supposed to report their specific share of partnership income or loss on
their respective personal tax return (Partnerships: Internal Revenue Service). The decision to pay
salary will reduce the taxable amount of the partnership business.
In case the partnership business would pay a dividend to the client and his daughter, the dividend
amount will be taxable at the income tax rate of the individual partners. The dividend amount is
not considered to be a deductible amount in the context of a partnership business, and hence it has
to be paid to the partners out of the after-tax profits. The dividend policy that is adopted by a
business entity has a direct implication on income smoothing, which is a form of managing and
Business entity a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 3
adjusting the business revenue (Firnanti, 2019). By paying the dividend to the partners, the
business will get the opportunity to adjust and manipulate how it represents the revenue that has
been earned by it.
E. Percentage of ownership
The type of business entity that has been recommended in the case of the client business is a
partnership. Based on the ideal business type that has been identified, the percentage of ownership
that must be considered is 60 % for Bob Jones and 40 % for Mandy Jones. According to the
available salary figures that have been presented, the total salary of the client and his daughter
stand at $ 250,000 ($ 180,000 + $ 70,000). Based on the new ownership % between the father and
the daughter, Bob’s salary is $ 150,000 (i.e., 60 % of $ 250,000), and Mandy’s salary is $ 100,000
(i.e., 40 % of $ 250,000). Such a percentage of ownership has been determined based on a number
of factors. Firstly, the used car business originally belongs to Bob, and he has decided to expand it
further, so he needs to have a higher percentage of ownership in the business as compared to his
daughter, who will newly join it. As Bob has made a significant contribution to the business in the
form of investment, land and building, etc., his share in ownership is higher. The ‘special
allocation’ rule must be taken into consideration in the case of the partnership business so that the
profits and losses can be distributed in a systematic manner between Bob and Mandy (Nicolo et
al., 2019).
According to the provided case scenario, Bob intends to introduce Mandy into the business as an
owner and manager with a probable 40 % interest. By following the 6:4 (or 3:2) ownership ratio,
the burden of liability on Mandy in relation to the business operations can be restricted, and she
will be able to actively take part in the business activities, including the decision-making process.
Business entity a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 4
The partners of a partnership business are liable to outsiders as they have to incur debts along
with other obligations during the normal course of the business (Slorach & Ellis, 2021). Although
both partners will be jointly liable for the financial obligations of the company, the lower
percentage of ownership will ensure that the burden on Mandy is lower in comparison to that of
her father, and thus, she will also have an advantage in terms of the tax that will be charged on her
income.
Thank You
Business entity a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 5
Reference
Firnanti, F. (2019). The influence of dividend policy and income tax on income smoothing.
GATR Acc. Fin. Review, 4(1), 15-20.
Nicolo, A., Sen, A., & Yadav, S. (2019). Matching with partners and projects. Journal of
Economic Theory, 184, 104942.
Partnerships: Internal Revenue Service. Partnerships | Internal Revenue Service. (n.d.).
Retrieved February 23, 2023, from
https://www.irs.gov/businesses/partnerships#:~:text=A%20partnership%20must%20file%2
0an,or%20losses%20to%20its%20partners.
Slorach, J. S., & Ellis, J. (2021). Business Law. Oxford University Press.
