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Partnership versus Corporation; Case Study

Please advise if I'm headed in the right direction answering these two questions. For the first question I think operating as a corporation would be better, however since they already predict a loss for three years I'm unclear how this would come into play.
Regarding the second question, wouldn't they partnership be able to deduct the salaries paid for a performed service?
1. Tony and Susan are starting a retail business selling formal wear for men and
women. They estimate profits and losses for the next five years to be: ($20,000),
($10,000), ($5,000), $10,000, and $50,000 respectively. Susan will work full time
in the store while Tony will be involved in managing the operations. Susan is married
to Tom and is in the 28% marginal tax bracket. Tony is single and has other
sources of income that put him in the 28% marginal tax bracket. Susan will be paid
a salary of $30,000 for the first five years, after which her compensation will be reviewed. Tony and Susan each contribute $50,000 to get the business started.
The remaining question facing Tony and Susan is which business form to use for
the business. They believe they should operate as a partnership but have been
informed that forming a corporation might be a better option since it would limit
their liability. Prepare an analysis to determine whether Tony and Susan should operate
their business as a partnership or a corporation.

2.Tory, Becky, Hal, and Jere form TBHJ Partnership as equal owners. TBJH Partnership
rents heavy tools and equipment. Becky and Hal are married to each other
while Tory and Jere are brothers but are not related to Becky or Hal. Because
Becky and Hal have other jobs, Tory and Jere are to be the full-time managers of
the business. Although Tory and Jere will run the business full-time, Becky will
help in the store on weekends and some evenings. Hal will lend his financial expertise
to the firm by doing the bookkeeping and preparing the tax returns. Even
though the four have equal ownership interests, it is not clear how each owner is
to be compensated so that there is equity among the partners yet rewards for those
engaged in specific tasks. Hal has told the others that they cannot receive deductible
salaries. However, he suggests that guaranteed payments be made to each partner/
employee for an agreed-upon amount based on the value of the services each
provides and/or the time spent at the store. Discuss the ramifications of employing
this plan and whether this is an equitable way to allocate compensation among the
partners. What are the implications of this arrangement for the partners and the
partnership?

Solution Preview

Partnership vs. Corporation

Hello my name is Linda Chingosho and I will be guiding you into answering the question you submitted regarding partnerships vs corporations.

The first question states that we have 2 individuals Tony and Susan. They both own a clothing retail store with the following future estimates.

Year: 1 2 3 4 5
($ 20 000) ($ 10 000) ($ 5 000) $ 10 000 $ 50 000

Tony and Susan should consider the following aspects of a partnership;
- A partnership is not a separate legal entity this means that the business itself won't be taxed. What happens is that the partners divide earning and losses amongst each other say for instance $ 5000 each in year 4, then that amount is taxed on the partners within their personal capacity. So then Susan for example would be liable for tax of $1400 ($5000 * 28%). I suggest you compare this figure to the amount that she would have received had the company ...

Solution Summary

The expert examines partnership versus corporation for a case study.

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