Kim will contribute $150,000 cash and will get a 25% share. In this case S-Corporation will be better for her as Kim will be entitled to vote for the board of directors using her 25% ownership. This will ensure that she vote for a responsible board since she won’t be actively involved in the management of the business. She will have limited liability to seize only the corporate assets and therefore cannot reach out to her personal property. There is the free transferability of ownership interest without attracting adverse consequences of taxation for her.
Martha will contribute $60,000 cash and will get a 10% share. Martha should weigh more towards LLC since, the requirements during formation are less than those of a corporate firm. She can have limited liability against the obligations and debts. This means the creditor can only seize the assets of the company and not her personal assets. The LLC can choose to be treated taxed like an S corporation. This will help her to lower the tax bill by awarding a reasonable salary in order to be able to treat the rest of her unearned distributions as therefore reducing her overall tax obligation. There is no transferability of shares, though this can be avoided through a restricting agreement or sta...
... middle of paper ...
...dures of the business. Taking these factors under consideration all the parties may consider setting up an LLC due to the fact that it will favor them due to limited liability therefore protecting their personal property, flexibility in management as well as less formation costs as compared to a corporation. Also they will have tax advantages if they are taxed as an S-corporation in that their distributions in the business will not be taxed therefore minimizing the tax liability.
In alternative 1 it is recommended to form limited liability partnership so that liability of George and Martha can be limited and as they have either not to contribute or very little, their personal assets are not liable towards business liabilities. In alternative 2 as FFE and land and building is also contributed by Tom along with mortgage assume, it is recommended to form a corporation.
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