Rondo and his business associate, Larry, are considering forming a business enti

Question

Rondo and his business associate, Larry, are considering forming a business entity called R&L but they are unsure about whether to form it as a C corporation, an S corporation, or an LLC taxed as a partnership.

Required information [The following information applles to the questions displayed below] Rondo and his business assoclate, Larry, are consldering forming a business entity called R&L but they are unsure about whether to form lt as a C corporation, an S corporation, or an LLC taxed as a partnershlp. Rondo and Larry would each matter which entity type is formed. Shortly after the formation of the entity, the business borrowed $74,000 from the bank. If applicable, this debt will be shared equally between the two owners. a. After taking the loan Into account, what Is Rondo's tax basis In his R&L stock if R&L Is formed as a C corporation? s tax

Explanation / Answer

1. Rondo's tax basis if R&L is formed as a C corporation:

$270,000

C corporation shareholders do not include entity debt in the tax basis of their stock in the corporation. Hence, Rondo's tax basis would be his own investment in the firm.

2. Rondo's tax basis if R&L is formed as an S corporation:

$270,000

S corporation shareholders do not include entity debt in the tax basis of their stock in the corporation. Hence, Rondo's tax basis would be his own investment in the firm.

3. Rondo's tax basis if R&L is formed as a partnership:

$ 270,000 + $37,000 (half of $74,000) = $307,000

The owner of an LLC includes his share of the LLC’s liabilities in his ownership interest.

Here, Rondo's tax basis would be his own investment of $270,000 plus his share of the $30,000 debt which is $15,000

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