Running Head: Business entity d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d 1
Milestone Four: Business Entity – Draft of Conclusion
Business entity d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d 2
II Conclusion
A. Advantages and Disadvantages of diverse business types
The type of business entity that is chosen by Bob Jones can have a direct implication on the
taxation rules that will be applicable to the income that is generated from the business operations
(Fuest, 2019). A comprehensive comparison has been made between diverse business types by
identifying them as tax vehicles that can meet the needs of the client.
Sole Proprietorship – From the taxation perspective, a sole proprietorship business is
considered the same as the owner. The income and expenses relating to the business are
considered the personal income of the owner. The tax computation is simple as the tax has to be
reported on the personal tax return of the owner. The main advantage is that the owner does not
have to file the tax return of the business separately. The chief disadvantage of the business type
is that it does not offer any security to the owner on personal liability.
Partnership – In a partnership business, the profits and risks are shared between partners. From
the taxation point of view, the tax amount is calculated as the personal tax of the partners. The
main advantage is that the partners need to pay the tax amount just once, as the business does not
have to pay tax on the generated income. Some of the disadvantages associated with the business
type include complex tax preparation as compared to sole proprietorship business and personal
liability for financial obligations.
S Corporation – S Corporation enables businesses to make sure that their profits pass through to
the personal tax return of the owner. Due to such a rule, it is possible to avoid the need for
taxation, which acts as its main advantage. According to IRS, S Corporations do not have to pay
Business entity d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d 3
federal income tax apart from tax on specific capital gains (S corporations – Internal Revenue
Service). However, in order to operate an S Corporation, it is essential to comply with additional
legal requirements as well as scrutiny by the Internal Revenue Service (IRS). These requirements
increase the complexity of operating such a business type.
C Corporation – A ‘C Corporation’ refers to a business structure where the owners and the
entity are charged tax separately. As owners have a separate identity, they get protection
regarding liability and financial obligation, which is a major advantage. However, the main
disadvantage of the business type is that it leads to double taxation, which diminishes the
profitability and revenue of the business (Rabbi & Almutairi, 2021).
The ideal business type that Bob must consider is the partnership form of business as it will help
to share risks with his daughter while handling the tax aspects in a simple manner as compared
to. S Corporation and C Corporation business types. S Corporation is not ideal as it can lead to an
increase in legal compliance requirements increasing business complexity. Similarly, C
Corporation is not a feasible option as it can lead to double taxation issues. A partnership is safer
than a sole proprietorship business type since it can help reduce business risk and decision-
making responsibilities, thereby influencing business performance (Marić et al., 2019).
B. Liquidating the business
In case Bob has to liquidate the business, the type of business structure that is chosen will directly
influence the liquidation process. The liquidation process is simplest in the context of a sole
proprietorship business, as the business assets will be identified as the personal assets of the
owner. The liquidation is more complex in the case of a partnership, as the partners share
Business entity d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d 4
ownership and responsibility. While liquidating a partnership, the proceeds from the sale of
business assets will have to be distributed based on the ownership percentage of the partners. The
complexity of business liquidation is high in the case of S Corporation as any losses or gains
from the sale of the business assets will be given to the shareholders, and the tax on the amount
will be reported on their personal tax returns. While liquidating a C Corporation business, the
losses or gains from the sale of business assets will have to be reported on the tax return of the
business, giving rise to tax complications. Thus, based on the liquidation of the business, the
most feasible business type is a sole proprietorship. d
C Transferring of business entity
The process that is followed for transferring the business entity varies based on the structure that
has been adopted. In a sole proprietorship business type, the transfer of business entity is
regarded as the sale of business assets, and the new owner has to take instant responsibility. In a
partnership, a partner has to transfer his assets that are under his name so that the other partner
can be considered the rightful owner of the business. In S Corporation, the transfer is complex as
the new owner will have to buy stocks from the existing business stockholders. The tax
implications may vary depending on the period for which the stock is held and the type of assets
of the business. In C Corporation, the transfer of a business entity involves the purchase of
business stocks from the existing stockholders. Based on the nature of transferring of business
entity, the ideal business type that Bob can consider is partnership due to its simple nature.
Reference
Business entity d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d 5
Fuest, C., Parenti, M., & Toubal, F. (2019). International corporate taxation: What reforms?
What impact?. Notes du conseil danalyse economique, 54(6), 1-12.
Marić, S., Uzelac, O., & Strugar-Jelača, M. (2019). Ownership structure as a measure of
corporate performance. Strategic Management, 24(4), 28-37.
Rabbi, F., & Almutairi, S. S. (2021). Corporate tax avoidance practices of multinationals and
country responses to improve quality of compliance. International Journal for Quality
Research, 21-44.
S corporations. Internal Revenue Service. (n.d.). Retrieved March 16, 2023, from
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
