BUL 2241: Module 1: Personal Financial Liability Company

BUL 2241- Module14 - Edward Olford

1. Because there was more than one owner, a sole proprietorship was not appropriate. A general partnership would lead to individual member liability: Since the deli failed, this would have subjected the partners to significant personal liability. A limited liability company, closely held corporation, or S corporation would both protect owners from personal financial liability. As the deli failed, this would be a benefit. An S corp would offer additional tax benefits, such as allowing investors to deduct their losses from the investment.

2. Yes. The Biscuit Bakery was a sole proprietorship. No matter how Mrs. Meadows signed the contracts, she is still personally liable for the debts of the business. Since

One difference is taxation. C corporations are separate taxable entities. They file a corporate tax return and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends. S corporations are considered to be pass-through tax entities. They file an informational federal return, but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners. Another difference would be personal income taxes. When it comes to C and S corporations, personal income tax is due both on any salary drawn from the corporation and from any dividends received from the corporation. Another difference is corporate ownership. C corporations have no restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. Also, S corporations can have only one class of stock, while C corporations can have multiple classes. C corporations therefore provide a little more flexibility when starting a business, expand the