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Business and Taxation

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1. For tax purposes, what is the best form of business entity to have? Why?

2. Is a budget always necessary in business? Why or why not?

3. Is a budget always necessary in personal money management? Why or why not?

4. Should individuals be taxed the same as business entities? Why or why not?

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Solution Summary

Regarding tax purposes, this solution discusses the best form of business entity to have, and why. It discusses if a budget is always necessary in business and in personal money management and whether individuals should be taxed the same as business entities. Provides rationale. Supplemented with an article on how to choose a business entity.

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1. For tax purposes, what is the best form of business entity to have? Why?

Basically, three separate categories of entities exist: partnerships, corporations, and limited liability companies. Each category has its own advantages, disadvantages, and special rules. So, there is no single best form of ownership for a business. That's partly because the limitations of a particular form of ownership can often be compensated for and because each form of business has its advantages and limitations. For instance, a sole proprietor can often buy insurance coverage to reduce liability exposure, rather than form a limited liability entity. Even after you have established your business as a particular entity, you may need to re-evaluate your choice of entity as the business evolves. An experienced attorney and tax advisor can help a business owner decide which form of ownership is best for her or his business. (1)

However, corporations have the largest tax benefits in some (if not all) cases. Although all corporations offer more tax benefits than other forms, a S corporation seems to offer the most. For example, a corporation must satisfy several requirements to be eligible for treatment as an S corporation for federal income tax purposes. However, qualification as an S corporation offers a potential tax benefit unavailable to a C corporation. If a qualifying corporation elects to be treated as an S corporation for federal income tax purposes, then the income, gains, deductions, and losses of the corporation are generally passed through to the shareholders. Thus, shareholders ...

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