Question

you will give an example of a hypothetical small business startup situation and recommend the particular business form you feel is most appropriate based on the characteristics of the business in your example and the benefits of your chosen entity, and you will justify your choice.

Insight gained from this discussion will be useful in choosing the appropriate business form for the clients from the final project scenario as you complete Milestone One.

Sole proprietorships, partnerships, limited liability corporations, C corporations, and S corporations all have distinct potential advantages and disadvantages for tax purposes. However, potential tax implications must be considered in tandem with the characteristics of a business and the expectations and goals of the business owners to ensure the best choice is made. When working as a financial advisor, one issue that often arises is the need to assist a new business owner in identifying the correct form a business should take, mainly for tax purposes.

Choose one of the five taxable entities and present an example of a specific hypothetical startup business situation for which your chosen entity might be appropriate, given the business characteristics of the example you provide and the potential benefits a particular form of entity offers. For example, if you gave the example of opening a chain of gas stations with three other investors, you would suggest what type of entity suits the situation and explain your reasoning. Assume that one of the owners of your hypothetical business is a Canadian citizen who is not a U.S. resident alien.

Answer 1

Let us take the example of the Housing finance startup operating in the advisory services domain to help their clients in the house mortgage process and minimizing the paperwork required in the entire process of housing loan application process. The startup aims to mitigate the time period required for grant of housing loans through their team of consultants,housing finance advisers and customer support team to handle and solve customer queries to ease the entire process of housing finance which ultimately result in both time as well as cost-savings for the customers.

Type of business form depends upon the nature of the business, scale of the business, the kind of industry/sector organization is operating in and other internal and external macro-economic factors that may impact the performance and overall organisation culture, structure and their short-term and long term strategies.

Choice of Business ownership forms among Sole Proprietorship, Partnerships, LLC, C Corporation and S Corporations are most likely to be decided based on several factors. Few factors are mentioned below

• Vision, mission, future goals & objectives of the organization
• Amount of control, influence or ownership stakes company is targeting
• Level of organizational structure and hierarchy company wants to build.
• Industry/Sector in which company is operating and their nature of business

Different Business ownership forms have their own business vulnerabilities and different tax implications.

For the housing finance startup having Canadian Citizen as the one of the owners of the business. Based on the factors & goals of the housing finance startup. They should have Limited Liability Company (LLC) is also known as hybrid entity as it combines organizational structure of the partnership and protection of limited liability of the corporation.

Tax implications for the members of LLC-  All the profits & losses of the LLC are passed through to members. Like the partners in the partnership form of business ownership, Profits & Losses are reported in the LLC members personal federal tax returns. In this business ownership form they are not taxed as the separate business entity. LLC business form helps in avoiding double taxation. Limited Liability company enjoys advantages in mitigating tax rates without changing their organizational structure. It also offers flexibility and taxes are simplified in this business form.

As stated earlier every business ownership form will have their own advantages and disadvantages and choice of business form should be decided based on several internal and external (uncontrollable for the company) factors of the business environment that impact organization performance and success.