Question

Alice and Bill plan to go into business together. For the first two or three years of​ operations, they anticipate​ losses, which they would like to use to offset income from other sources. They also are concerned about exposing their personal assets to business liabilities. Advise Alice and Bill as to what business form would best meet their needs.

A. LLC. While offering Alice and Bill the limited liability of a​ corporation, a limited liability company​ (LLC) with more than one owner generally is treated as a partnership for tax purposes.

B. C corporation.​ It's marginal tax rate will always be lower than Alice and​ Bill's so when the losses become​ income, they will be in a tax advantage.

C. S corporation. This will permit the losses incurred during the first few years to be passed through to Alice and Bill and be used to offset income from other​ sources, and affords them limited liability.

D. Either A or C.

Answer 1

The correct answer is Option D for the following reasons

-They should elect for S corporation. An S corporation election would give them the permit to PASS THROUGH the losses during the initial years and the same losses can be used to offset against the income from other sources.

As an alternative to S corporation, they may go for LLC. This is because it is taxed as a partnership but has an advantage of limited liability.