Question

George and May are a married couple. Before they got married, George bought a piece of land in rural Western Australia which he believed was rich in iron ore. Having established themselves financially, George and May decided to conduct explorative work and discovered that there is in fact iron ore deposit in the land, though how much is uncertain.

George and May decided that they want to conduct a business mining the iron ore. George owns the land and has other financial assets to contribute as capital while May's capital contribution will come from a substantial inheritance she is about to receive.

George and May are concerned about the riskiness of mining the iron ore and neither wants to lose their investments. However, they are both optimistic that the venture will be successful and that they will be able to expand the business and employ other family members.

Advise George and May as to the suitable business structure that they might use.

Assume they have both decided on an incorporated structure. Which would be the most suitable type of incorporated structure to use and what are the features of this structure.  

Answer 1

An incorporated business (also called a corporation) is a type of business that offers many benefits over being a sole proprietor or partnership, including liability protection and additional tax deductions. Forming a corporation also allows you raise capital through sale of shares of your company. According to Small Business Computing, there are three common corporate structure including:

• C Corporation: the most common business entity. It is formed as a separate legal entity that's wholly controlled by company shareholders.
• S Corporation: offers liability protection to shareholders, and shareholders enjoy certain tax breaks not offered under other business structures.
• Limited Liability Corporation: LLCs benefit from side-stepping double taxation on corporate profits (members report profit or loss on their individual tax returns).

Since, George and May are concerned about the riskiness of mining the iron ore and neither wants to lose their investments, most suitable business structure for them would be to form an S Corporation.

Features of S Corporation are:

• Limited liability of the members. This means one cannot use the personal assets of the shareholders for discharging the liability of the corporation.
• The corporation need not pay federal taxes at the corporate level. The income or losses are disbursed to the shareholders who will pay their personal income tax returns. Hence, the business losses can be set off against the income of any other shareholder. This might be really helpful for taxation purpose.
• Avoidance of double taxation.
• S Corp has a perpetual existence. It doesn’t affect by any owner’s death or dismissal.