2. Corporate Nature and Classification.
It is decided that the organizational form for this firm should provide limited liability for the owners. The owners will include John, Mary, Paul, and some members of their respective families. One of the features of the corporate form is limited liability. Ordinarily, however, corporate income is taxed at both the corporate level and the shareholder level. Which corporate form could the firm use to avoid this double taxation?
An organization like this could have a variety of options to avoid double taxation. However, the best corporate form for the firm to use in order to avoid double taxation would be S Corporation. By forming the S Corporation, the firm will be taxed like a partnership.
John, Mary and Paul’s business endeavor meets all the criteria necessary to form and operate as an S Corporation. They are a domestic organization. There are no affiliations with other corporations. If there are only three founding members and “some members” of their respective families involved, then they likely have less than 100 shareholders and all are individuals. Shareholders never have any personal liability for any of the business debt, but they pay personal income tax on any dividends drawn from business. The business would hold just one class of stock and all the members are citizens rather than nonresident aliens.
Which other forms of business organization provide limited liability?
The firm could form an LLC or LLP. The tax structure of the S Corporation is similar to the limited liability company (LLC) and the limited liability partnership (LLP). Both of those business structures offer greater flexibility than the S Corporation, which would allow the company to grow as needed without added stress of shareholders. Another advantage would the limited liability for its shareholders, as they’re not personally