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Cupcakes Case Study

Introduction

Formation of a C corporation as suggested by the attorney of Mimis Cupcakes is a great idea for the founder of the business organization. The corporation involves other different investors who come into the business as shareholders or co-owners of the business establishment. This paper will highlight the different tax benefits that the business will have as a corporation that were absent in the sole proprietorship, the paper also focuses on the parameters that are involved in the division of the business assets as well as the issues related to asset basis and the effects that the incorporation might have on sales and self-employment tax obligations. This paper also highlights options that can be used in the division of the assets taking consideration of the main store.

Tax aspects and benefits to the corporation

Taxation is a way in which the government acquires revenue. The C Corporation just as any other corporation undergoes double taxation. Double taxation occurs in the sense that the government taxes the profits of the business as well as the dividends rendered to the shareholders within the business. The C Corporation experiences several tax advantages from time to time that operate to the benefit of the business.

• Lower tax rates

Taxation of the newly created C Corporation will be to the advantage of the business as a result of lower tax rates. The government taxes the corporations at a lower rate for the first $75, 000 the business makes annually. The business might not make up to $75, 000 considering the size of the business and this means that it experiences lower tax rates (Gerard, 2018). The government will require the business to file lower tax returns which is to the benefit of the owners of the business because of reduced tax expenses.

• Improved financial control

Mimis Cupcakes is to be a C Corporation is a bakery that produces goods and not personalized service such as hairdressing and this allows it to apply the fiscal policy for its accounting. The business is subject to deductions and declarations that reduce the tax burden on the company (Gerard, 2018). The business has the ability to delay its tax filings to the end of the financial period. All these advantages that come alongside the creation of a C Corporation improves the businesss financial control.

• Minimized audit potentials

Incomes and losses never pass through a C Corporation like its routine with S Corporations. The several irregularities that exist in the S Corporations with regard to reporting of pass-income, as well as the losses, triggers the IRS to conduct business audits. The C Corporations have a reduced potential for continuous audits from time to time (Gerard, 2018). The audits may have effect on the business from time to time though small, these effects that come alongside audit procedures are what the C Corporations does not experience therefore it has smooth flow of operations.

• Split profits

Profits that arise from the business activities of the C Corporation can be divided between the business and the owners. The divided profits lower the income that appears to come from the business reducing the tax liability. The owners taxable income on the other side rises but with appropriate regulations, the owners can pay lower rates (Gerard, 2018). The business is able to split its income that appears in terms of profits between the shareholders and the business income and result in lower tax rates.

• Marginal benefits

Marginal benefits will occur to the business due to the fact that the shareholders are employed within the business organization. The business benefits that the employees who also double up as shareholders receive from the organization are deductible from the tax returns it is entitled to file (Gerard, 2018). Other benefits that are deductible may not be financial and by so doing the business shall have saved on the tax returns.

• Limited liability

Limited liability of the corporation is also another benefit of having the C Corporative as compared to the sole proprietorship. The shareholders liability is only limited to the amount of shares they own within the corporation (Dilov-Schultheis, 2018). This follows that in any case where the corporation fails to pay taxes, the shareholders private property cannot be involved in offsetting the tax liability of the Corporation.

• Perpetual existence

C Corporation, unlike the sole proprietorship, is entitled to perpetual existence provided an agreement between the shareholders still exists. The business operations can go on for as long as possible provided the shareholders still share the same goals as compared to a sole proprietorship whose dissolution can be unforeseen depending on the life condition of the owner (Dilov-Schultheis, 2018). The business is able to continue operation even when the sole owner is deceased.

Dividing assets between shareholders depends on

Asset division between the shareholders is a significant undertaking that requires utmost care to avoid further regrets that may arise from the negative impacts. There are certain parameters that are important to consider while dividing the assets of Mimis Cupcakes to the shareholders who come into the business. The shareholders should feel content with no feelings of discrimination from time to time.

Timing of the shareholders contribution is import to ensure fair division. The time in which the shareholders brought in their contribution is of great interest because those who contributed earlier should fairly receive a higher portion of the division (Robbins, 2018). The longer time that the contributions take within the organization improves its quality and worth.

Power of the shareholders also determines the amount of assets that an individual is entitled to. The power of an individual is determined by varied factors among them the amount of shares they buy as well as the voting rights that they own. The shareholders who contribute a lot to the business should actually have considerable shares of the assets (Robbins, 2018). Mimis Cupcakes main shareholder is Mimi Charpentier who owns 60% of the shares that is actually 51+ of the total shares.

Money contributed by the shareholders also determines the amount of assets that is allocated to them. Mimi Charpentier contributes a lot of money to the business and is more likely to get a larger portion of the assets (Robbins, 2018). The other shareholders can divide the other assets on the ratio of their financial contribution to the business.

Kind of contribution determines who receives what percentage. According to the case study, all shareholders contribute workforce and financial resources but Mimi Charpentier who is the initial owner of the business. When the business is talked of, the name of the initial owner acts as the point of reference which means that she also contributes goodwill as well as the customers and the reputation (Robbins, 2018). The initial owner of the business receives a higher percentage of the assets compared to the other assets.

Self-employment tax obligation to be met by the shareholders when the business turns into a C Corporation are likely to be inexistent. The business is no longer considered as a sole proprietorship and in turn, payment of self-employment taxes such as social security and the Medicare is not required. The C Corporation is only taxed on the profits and on the dividends given to the shareholders which is also known as double taxation as described in the introduction of this paper. The C Corporation is also subjected to varied tax deductions that all in all reduce the tax burden on the organization.

Mimis Cupcakes as a corporation can have efficient methods of distributing its assets to the shareholders without any complaints arising. The initial owner of the business can have two parameters in which to divide the assets. The owner can go on with the initial plan of giving the 40% of the assets to shareholders and continue controlling the more significant aspects of the business such as the main shop.

Division of assets can also involve the initial owner to own 67% of the business depending on the following parameters of asset division, time of investment, amount invested, type of investments made as well as the power. The other shareholders can divide 33% of the remaining assets depending on their contribution to the organization (Robbins, 2018). Following the two approaches available, the owner will still be in control of the business as the largest shareholder. The division of the assets should factor in all the depreciation involved (Lander, 2018). Factoring the depreciation ensures that the division is fair between the shareholders.

In conclusion, the establishment of a C Corporation is a more efficient way of managing tax burdens than sole proprietorships. The C Corporation has several advantages to a business organization than a sole proprietorship and involves appropriate parameters of dividing business assets.