ACC610 Week 6 Discussion 1 Advising for Potential Tax Loss

Abe is an entrepreneur who likes to be actively involved in his business ventures. He is going to invest $500,000 in a business that the projects will produce a tax loss of approximately $100,000 per year in the short run. However, once consumers become aware of the new product being sold by the business and the quality of the service it provides, he is confident the business will generate a profit of at least $125,000 per year. Abe has substantial other income (from both business ventures and investment activities) each year. Advise Abe on the business form he should select for the short run. He will be the sole owner.

Abe may choose to operate his firm as a sole proprietorship, a limited liability company (LLC), or an S corporation to enjoy the advantage of passing losses on to subsequent owners while offsetting those losses with other income. A further benefit for Abe is that once the company begins to generate profits, he will be subject to a single taxation rate. Last but not least, in this scenario, Abe would be better off forming either an LLC or an S corporation because of the benefit of limited liability that these business structures offer.

References

Hoffman, W. H., Raabe, W. A., Smith, J. E., Maloney, D. M., & Young, J. C. (2016). South-western federal taxation 2016: Corporations, partnerships, estates and trusts (39th ed.). Mason, OH: Southwestern Cengage Learning.