Mike and Sam (two individuals) want to organize an entity to combine their two businesses. The combined business is expected to generate significant taxable income in the future. However, the combined business expects to lose money in the first few years of operations, i.e., report a taxable loss for the first few years.

QUESTIONS/ISSUES:

1. What entity would you advise your client to form?Please include in your discussion a compare and contrast of the different forms of business regimes including a discussion of a C corporation, an S corporation, a limited liability company (LLC). Also, include in your discussion the different tax consequences between the different types of entities including which of these regimes requires the business entity to pay tax on the income earned and which of these regimes requires the entity owners to pay tax on the income earned by the entity.

2. Discuss the short term vs. long term benefits/detriments of each form of business regime.

3. What if the combined entity reinvests all their profits back into the business (i.e.: no distributions to owners/shareholders)? Does this change any of your advice?

Instructions: Using the above as a background conduct an interview with the clients (Mike and Sam) and gather additional facts (for example, amount of loss and Income expected to be generated by the combined business; personal marital status and tax brackets; spouses income, if any; future growth plans (initial public offering)). All facts should be documented in the memorandum and appropriate schedules and exhibits should be included.

IMPORTANT: I am required to choose a specific business (a coffee shop for example) and make up particular numbers for it. Therefore I will appreciate a detailed, comprehensive and complete answer, not just some general facts!