To: Penelope, Mark, and John
Date: October 13, 2013
Re: Entity Selection
The different forms of organization you can elect are joint venture, corporation or partnership. The form of corporation you can chose is an S corporation which will help you avoid double taxation. Since you will be working in an environment that incurs various risk (liability) issues I would recommend to establish a Limited Liability Corporation because it would protect the partners to a higher extent.
The LLC is the preferred choice because it contains aspects of both a partnership and a corporation that provides protection for its members. The LLC needs to actually be a business ...view middle of the document...
The articles of incorporation is filed with the state and an application for an EIN (federal tax id number) and then file form 8832 to choose an S corporation status. Every year the company would have to file an 1120S and the members would than receive a K – 1 that contains the appropriate percentage of income/loss (IRS).
The distribution of income or loss would be done based on your agreed upon percentages that should be in your bylaws. You can elect to be equally or based on your capital contribution. But make sure that you are paying yourself a reasonable amount of compensation for your any work conducted for the business because not doing so will send red flags to the IRS because not employee taxes were paid which might cause you to lose your S corporation status.
The portion of earnings each of you will receive from salaries will be taxed and a W2 would be given at the end of the year to use for tax purposes which would include the amount paid for FICA. Since an S corporation does not pay federal taxes rather it flows through to its owners whom should file a 1040 tax form containing a Schedule K – 1 to include distribution of income or loss from the corporation (IRS).
Contributions such as cash, property would be included in the owner’s basis. Than computing the stock basis with start with the initial contribution but then change based on the flow-through amount. So as income increases or decreases so would the stock basis. This would be computed on the schedule K – 1 (see below) (IRS).
Shareholder’s stock is increased by (using 2011 Form 1120S Schedule K-1 line items):
| Schedule K-1 |
1. Ordinary income | Line 1 |
2. Separately stated income items | Lines 2 - 10 |
3. Tax exempt income | Lines 16a & 16b |
4. Excess depletion | Line 15c |
A shareholder's stock basis is decreased, but not below zero, by.
| Schedule K-1 |
1. Ordinary loss | Line 1 |
2. Separately stated loss items | Lines 2 - 12d
and 14l, 14m |
3. Nondeductible expenses | Line 16c |
4. Non-dividend distributions | Line 16d |
5. Depletion for oil and gas | Line 17r |
The only issue with debt would be if the property brought in has a...