Bob Jones has a small repair shop that he has run for several years as a sole pr
ID: 2379273 • Letter: B
Question
Bob Jones has a small repair shop that he has run for several years as a sole proprietor-ship. The proprietorship uses the cash method of accounting and the calendar year as itstax year. Bob needs additional capital for expansion and knows two people who might beinterested in investing in the business. One would like to work for the business. The otherwould only invest.Bob wants to know the tax consequences of incorporating the business. His businessassets include a building, equipment, accounts receivable, and cash. Liabilities include amortgage on the building and a few accounts payable, which are deductible when paid. Assume that Bob
Explanation / Answer
Memo:
The tax advantages of incorporating a salon business as a C corp. is that it will be easy for
expansion into issuing equity and different kinds of stock later on .Stacy should look at the
advantages of further issuance of capital along with certain very important tax benefits accruing
to a C corp. While deciding on the tax consequences it would be important to know how much of
profits one wants to distribute to others and how much reinvestment into the business is needed.
A C corporation would be an ideal from of incorporation as this type of firms file form 1120.
Since the lower tax