Question

A client has an opportunity to start a new service business and he asks you to explain the pros and cons of setting up a partnership or traditional c corp. he states that he will make $75,000 in the first year but that he expects it to grow to $750,000 within 5 years, as he plans to reinvest all the profits back into the business. What advice would you give him?

Answer 1

Partnership-A partnership is a form of business where two or more individuals share ownership, as well as the risk for managing the company and the profit or losses the business generates is distributed among them in predetermined manner.

Pros of Partnership-

• You benefit from additional knowledge & experience
• You have less financial pressure
• You have an extra support

Cons of Partnership-

• You have to share profits
• You can’t make decisions on your own
• You will have disagreements
• You aren’t separate from the business
• You’re taxed individually

C Corporations-C corporation is a legal structure for a corporation in it the owners, or shareholders, are taxed separately from the entity.They are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.

Pros of C Corporations-

• Easy to transfer ownership.
• Owners have limited liability.
• Certain expenses are tax deductible.
• Easier to raise capital.
• Corporations have perpetuity

Cons of C Corporations-

• States have higher fees.
• More state & federal regulations and oversight.
• Double taxation of corporation profits.
• Forming a corporation is costly

Our Suggestion-

• As client will make $75,000 in the first year but that he expects it to grow to $750,000 within 5 years, as he plans to reinvest all the profits back into the business, it is necessary that he must be able to take decisions independently.
• In case of partnership client would not be able to make decisions on his own.
• Looking upon the situation i wiil suggest him to prefer setting up Traditional C Corp.

Thanks,

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