Summary: Business Entity Distinctions

Improved Essays
A. Business Entity Distinctions
Business entities are chosen based on three criteria: liability, taxation, and recordkeeping. The first criterion (liability) focuses on how much debt an owner is personally liable for as well as how the debt ratio affects an owner’s ability to acquire capital. In his current election as a sole proprietorship, Mr. Jones is personally liable for all debts incurred while in operation. If Mr. Jones is unable to repay business debts; his personal assets can be seized to pay back everything owed. Partnerships are like sole proprietorships when it comes to business liability except the burden falls on the shoulders of two or more individuals instead of just the sole business owner. Each individual who contributes cash
…show more content…
Jones has the opportunity to change the election of his current sole proprietorship to an S-corporation. However, he also has the options of liquidating the business as it currently stands or make the election and then liquidate the business as an S-corporation. The business assets contributed to the used car dealership belong to the sole proprietor, Mr. Jones. Liquidating the used car dealership requires Mr. Jones to repay any leftover debts using assets belonging to the business. The completion of the final Schedule C form requires Mr. Jones to provide accurate accounting information from a personal recording standpoint as well as for references on the Form 1040. Providing accurate accounting information includes closely monitoring outstanding accounts payable and preparing for future bills that may arrive while the business is in the process of liquidating. Maintaining an up-to-date accounts receivable allows Mr. Jones to visualize the inflows that will balance current and future outflows. Something to keep in mind when liquidating is that managing inflows and outflows is significantly different then tracking business income, so it has no affiliation with the IRS. If Mr. Jones has a drawing account for the business, he is able to withdraw the funds and keep whatever is left over from paying off creditors. Flowing of funds from the business account to the personal account are not on the radar for the IRS unless Mr. Jones’ business is requiring an audit. Depreciable …show more content…
The transferrable assets are subject to regular restrictions like laws that protect assets from fraudulent conveyance. Florida Statute Chapter 726 defines fraudulent conveyance as completing a false transfer of property to a third party with sole intentions to mislead a potential creditor. A remedy of the Chapter 726 statute is that it allows any misled creditors the opportunity to sue the debtor into reversing the transfer within four years after the conveyance occurred for real property and twenty years for personal property. Any transfers made after the statute of limitations are not subject to fraudulent conveyance judgement. If Mr. Jones wanted to transfer some property to his daughter or to a family friend, he must be prepared to defend his transfer in case creditors become suspicious. He needs to make sure that his reasoning for transferring business activity to his daughter is legitimate and it will not impact debt repayment. If Mr. Jones decides to transfer the business as a sale, he is going to report the results on his 1040. Since the used car dealership has reached its first year of operation, Mr. Jones can characterize the long-term capital gain and can use special tax rates if it results in a gain (Gross 2009) (Fraudulent Transfers

Related Documents

  • Improved Essays

    Unit 1: Sole Contractorship

    • 2286 Words
    • 10 Pages

    Just like the sole proprietorship, the partnership is 100% liable and creditors may go after business assets, or personal assets of either or both partners. • INCOME TAXES – Taxed like a sole proprietor where each partner pays taxes on their income from the business like it was there personal income, and expenses may be written off to offset business expenses. Since the partnership is also not considered a separate entity, the business is taxed only once. • LONGEVITY/CONTINUITY – Once a partner exits the business or dies, it is dissolved and a new business form must be created in order for the business to continue operating. • CONTROL – Partners have equal control in all decision making and operations of the business.…

    • 2286 Words
    • 10 Pages
    Improved Essays
  • Improved Essays

    Arcadia Sports Case Study

    • 1678 Words
    • 7 Pages

    An evaluation will be made to demonstrate how Jeb’s personal creditors would be able to collect on his debts and to seize the assets and/or profits from Arcadia Sports based on whether each business is a sole proprietorship, partnership, a corporation, and a limited liability company. First, under a sole proprietorship, Jeb’s creditors would be able to seize all of his personal assets, his home and all of the profits from Arcadia Sports. The reason for this is that a sole proprietorship is not a separate legal entity, and the sole proprietor is personally liable for all debts and actions (Kubasek, 2012). In this situation, Arcadia Sports would be considered an asset of Jeb’s for the sake of those seeking payment on his…

    • 1678 Words
    • 7 Pages
    Improved Essays
  • Decent Essays

    It can be privately owned or a public company with shares trading on the stock market. As an entity separate from its ownership, a corporation can buy and sell property, sue and be sued, etc. As a separate entity, a corporation provides limited liability for its owners, who are not liable for its debts. It also means that the owner 's personal property is safe from a lawsuit against the corporation ((2014, October 27)). Pros: Owners have limited personal liability for business debts Benefits can be deducted as a business expenses Lower overall tax rate Owners can split corporate profits among each other and corporation Cons: More complicated Costly Difficult to maintain Complicated to run Limited Liability Corporation The limited liability company (LLC) is a legal business entity created under state law.…

    • 748 Words
    • 3 Pages
    Decent Essays
  • Superior Essays

    Review The purpose of a review is to provide limited assurance that financial statements do not have any known errors or departures from the accounting rules found in GAAP. There is usually no testing of information in the financial statements beyond inquiry and analytical review. The CPA will not obtain an understanding of the internal control system or address how the organization is addressing the risk of fraud in the financial statements (Ulvog, 2006). A review involves the CPA performing procedures that will provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework. A review does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records; or other procedures ordinarily performed in an audit (Barfield, Murphy, Shank & Smith LLC, 2013).…

    • 1358 Words
    • 6 Pages
    Superior Essays
  • Improved Essays

    I did find several irregular entries that he suspected to be bribes but he took no action regarding the information. I also rendered tax advice concerning tax shelters in the Cayman Islands to the firm 's president. In addition, he prepared financials or the proxy statements that were filed with the SEC In anticipation with the merger. The proxy statements were used by Prosser bank without my knowledge) to secure a loan for Cardozo & Co., Inc. It was revealed that Cardozo & Co., Inc 's President had been siphoning money from the company, while still making the company look profitable.…

    • 1799 Words
    • 8 Pages
    Improved Essays
  • Improved Essays

    The business does not proceed if the owner gets to be perished or incapacitated, since they are dealt with as one and the same. Upon the owner's demise, the business is exchanged and gets to be a piece of the owner's close to home domain, to be circulated to beneficiaries. This can bring about substantial tax outcomes on beneficiaries because of legacy taxes and domain taxes. Since the beginning trusts are generally given by the owner, it can be hard to generate capital. Sole proprietorships don't issue stocks or other money-creating ventures like corporations…

    • 903 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    They are jointly and severally unlimitedly liable to their creditors. Creditor may go after the assets of partnership unit, and further may go after each individual general partner’s personal assets to satisfy a liability. A limited partner’s liability is limited to the amount of their investment. · Income Taxes: All partners pay taxes on their share of profits as personal income. · Longevity/Continuity: The death of any general partner causes the partnership to dissolve.…

    • 2050 Words
    • 9 Pages
    Superior Essays
  • Improved Essays

    Phar-Mor Fraud Case Study

    • 482 Words
    • 2 Pages

    In order for the fraud to be successful, it was imperative that the fraud be concealed from the auditors. Being that the bulk of key personnel concerned with the fraud were former auditors for Coopers, this was not hard to attain. These employees knew the audit planning strategies that would be implemented. Coopers historically did not perform audit testing of zero balance accounts, this would mean the “bucket-account” used to hide personal expenses would not be reviewed by the auditors. Coopers also gave Phar-Mor advanced knowledge of the stores where they would observe physical inventory counts for the annual audit.…

    • 482 Words
    • 2 Pages
    Improved Essays
  • Decent Essays

    o Sole Proprietorship: o Liability- Business owners do not possess any particular differences in regard to assets. The assets of the business can really be used in many ways, including the way to pay any personal debt that was acquired also the personal assets are a way to pay the business debts too because when dealing with a sole proprietorship it is subject to being accessible to unlimited liability. o Income Taxes – The income or the revenue brought in with a sole proprietorship is always considered ordinary personal income tax to the owner, and is sometimes subjected to having the most rate of taxation by the I.R.S. o Longevity and Continuity– Because a business owner and the business are somewhat in the same group or group’s legally…

    • 1915 Words
    • 8 Pages
    Decent Essays
  • Improved Essays

    It is essential to list beneficiaries to your 401(k), IRA, etc., because failing to do so will produce income for the estate when the executor closes these accounts. As a result, the amount will exceed the $600.00 threshold forcing the executor to file the estate income tax return. By listing beneficiaries to retirement accounts, the accounts become property of the beneficiaries, not the estate. • Own rental property in joint tenancy. In simple terms, when one owner dies, ownership of the property goes to the surviving joint tenant.…

    • 712 Words
    • 3 Pages
    Improved Essays