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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

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