Question

Here are four possible progressions for legal form as a startup company grows. Answer the questions on the right

a. Sole proprietorship to limited partnership to general partnership to corporation

b. Sole proprietorship to general partnership to S Corporation to C corporation

c. General partnership to sole proprietorship to corporation

d. General partnership to C Corporation to Subchapter S Corporation

Which of the choices (a through d) makes the most sense?						<< answer here
	Explain why the progression pattern from the left side either makes sense or not. To receive full credit, describe liability and tax aspects.

this is the full information

Answer 1

In this case the progression pattern that makes sense is only the pattern as mentioned in “b” – sole proprietorship to general partnership to S corporation to C Corporation.

In case of a sole proprietorship the entire liability is borne by the sole proprietor/owner and even the tax burden of the sole proprietorship entity will be on the sole proprietor.

When a business grows then the natural progression for sole proprietorship is general partnership. In case of a partnership there will be two or more partners and hence the ability of the business to raise capital will be better than sole proprietorship. Moreover the financial burden will be shared by all partners. All the partners are liable for the business and the profits and losses flow through to the partners in the business, who are then responsible for these amounts. Thus, the business entity does not pay income taxes, but the partners will pay taxes.

The progression from general partnership is to that of S Corporation. S Corporation gets the benefit of a corporate entity while still being taxed as a partnership. Liability of each shareholder is limited to the extent of his/her capital contribution. With regards to tax S Corporations may pass business income, losses, deductions, and credits to shareholders. Shareholders report income and losses on individual tax returns, and pay taxes at ordinary tax rates.

When a company grows even bigger in size and needs larger number of shareholders then it can take the form of C Corporation. This allows for more than 100 shareholders. Liability of each shareholder is limited to the extent of his/her capital contribution. With regards to tax C Corporation the taxation of profits is done at the corporate level. Dividends face double taxation and are taxed both at the corporate as well as the individual level.