Three Criteria Of Business Entity Functions

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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
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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

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