Peggy, Phil, and Ralph each have unincorporated accounting practices, and they wish to pool their resources and operate as a single business entity. Peggy owns a building that has appreciated in value since she purchased it eight years ago. They intend to use this building for their office. Other than the building, they own office equipment, computer equipment, and furniture, none of which is worth more than book value. They all have substantial outstanding accounts receivable with a zero basis because each individual uses the cash method of accounting. Each individual has substantial amounts of portfolio income (i.e., dividends and interest) earned outside of their business activities. Under the plan, accounts payable with a zero basis from the unincorporated accounting practices would be transferred to the new entity.

Each accountant has two or three employees. They all agree on the importance of providing benefits to their employees, such as group health insurance, group term life insurance, and a retirement plan of some kind. Additionally, they wish to have their staff participate in the profits of the company and have some form of equity interest in the company.
Peggy, Phil, and Ralph use different computerized accounting and billing systems. They also have different documentation requirements for their client files. The computerized accounting records, billing records, and client files will all have to be consolidated from three systems to one system. The conversion will take place over a period of time. For this reason, they anticipate reporting a loss for their first tax year.
Peggy, Phil, and Ralph have agreed that they want to operate as a pass-through entity because they wish to avoid double taxation, and they want to use the losses from the first year immediately. They have come to you for advice. Prepare a client memo comparing the pros and cons of operating the accounting practice as a partnership or an S corporation.