Scenario: After 20+ years of working for other firms, three professionals are considering combining forces and establishing their own practice. The three professionals are Penelope (enrolled agent, age 41), Mark (CPA, age 43), and John (CVA, age 65). Penelope specializes in taxes, Mark is an auditor, and John is a business valuation expert.
There are various options available regarding entity selection for the new business venture. The appropriate business entity for any individual(s) will depend on their particular facts and circumstances.
You are a valued colleague and friend of this trio, and they have come to you seeking advice as to how to structure their new business. Please consider the following tax and nontax issues as you recommend an entity choice to Penelope, Mark and John.
1. Research and describe the main characteristics of the various forms of organization (i.e., entity) that are available to Penelope, Mark, and John.
2. Become familiar with the tax implications of choosing one form of organization over another.
3. Make your recommendation as to what form of organization (choosing only one) you believe will be most beneficial for the group from a tax standpoint. Be sure to explain the reasoning for your choice. Once your choice is made, discuss the various tax implications to the entity and to the three individuals, as follow.
4. Discuss the tax consequences of contributing cash, property, and/or services to the new entity (discuss only for the entity you have recommended).
5. Discuss, in detail, how this entity is taxed (if at all) and what filing requirements it has with the IRS (discuss only for the entity you have recommended).
6. Discuss how income and distributions may or will be allocated to Penelope, Mark, and John (discuss only for the entity you have recommended).
7. Discuss, in detail, how the individuals are taxed (if at all) with respect to the net profits from this entity and what filing requirements they will each have with the IRS (discuss only for the entity you have recommended).
8. Discuss how Penelope, Mark and John will calculate their "basis" in the new entity. Be sure to include the impact that debt has on basis, if any (discuss only for the entity you have recommended).
9. Regarding limited liability, discuss the exposure that Penelope, Mark, and John's personal assets will have to the debts and lawsuits of the entity you have recommended (discuss only for the entity you have recommended).
10. Conclude why entity selection is important to a newly forming business.