Choosing the Right Business Entity

1130 WordsFeb 27, 20125 Pages
Choosing the Right Business Entity By Rosa Martinez Professor Smith English 315 February 24, 2012 TRANSMITTAL TO: Small Business Owners FROM: Rosa Martinez DATE: February 24, 2012 ------------------------------------------------- SUBJECT: Choosing the Right Business Entity ------------------------------------------------- Enclosed is the Justification Report covering information related to different types of entities that could be chosen to establish a business. Furthermore, the report explains in full details the advantages and disadvantages of each business entity, and how those factors could fulfill the needs of each particular individual. To ensure that the right structure is selected, I will be glad to further…show more content…
The IRS stated that the sole proprietorship is much more likely to underreport its income. Sub-Chapter S Corporations Advantages * Limited Liability to the shareholders (owners) personal assets. * Investors are more likely to invest in this type of entity due to its protection, and easy acquisition of the company stocks. * Pass through entity: This simply means that in most circumstances all income pass to the shareholders to be reported under their personal income tax returns; therefore, profits are being taxed once vs. a C corporation where it is first taxed as the corporate level, and then in the shareholders personal return as dividends. Tax as dividends are tax max at a fifteen percent rate (15%) but it is still a double taxation. Most businesses have losses at the beginning of their operations. Having this type of entity can save in personal income tax against other income the shareholders report. Losses can be carried backwards during two (2) years, and or forward for twenty years if not fully used. Disadvantages * Very complex to keep in compliance with federal and local government. * Active shareholders compensation is required in a payroll. This requirement can be very expensive for a micro company since payroll taxes matching FICA (Federal Insurance Contribution Act) would be required. * Additional reporting in business records, in order to keep track of
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