Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Andy, Jim and Dwight are starting a professional paper shredding company, and they are still exploring the pros and cons of the following types of

Andy, Jim and Dwight are starting a professional paper shredding company, and they are still exploring the pros and cons of the following types of legal entities:

  • C-corporation
  • Limited partnership
  • S-corporation

Andy and Jim will each contribute $200,000 in cash in exchange for their ownership interest.Dwight will contribute a warehouse that he owns that will be used to house the shredder machines.The warehouse has an FMV of $290,000 and is encumbered by a $90,000 mortgage.Dwight purchased the warehouse 3 years ago for $180,000.It was agreed that the profit and loss from the company's operations will be divided equally (i.e. 1/3 each) amongst the three owners.

Andy will manage the company's operations in exchange for $75,000 in compensation per year.Jim and Dwight will have minimal involvement in the company's operations, as they also own and manage full-time a company they formed as an LLC that sells pickled beets.

In addition to the $90,000 mortgage on the warehouse that is considered qualified nonrecourse financing, the company will also have a $180,000 recourse loan with a local bank and $75,000 in nonrecourse accounts payable.Jim and Dwight will not be included as guarantors for the recourse loan.

Although the limited partnership is also a flow-through entity and allows for the 20% qualified business deduction similar to the S-corporation, Andy's effective tax rate would be higher if the owners formed a limited partnership when compared to his effective tax rate with an S-corporation due to the additional imposition of self-employment taxes.

TRUE OR FALSE

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing Cases An Interactive Learning Approach

Authors: Steven M Glover, Douglas F Prawitt

4th Edition

0132423502, 978-0132423502

More Books

Students also viewed these Finance questions

Question

Describe activity-based budgeting.

Answered: 1 week ago

Question

Explain process value analysis.

Answered: 1 week ago

Question

Describe activity-based financial performance measurement.

Answered: 1 week ago