John Petra, a simple Professor of Practice at a local University, has a life lon
ID: 2497843 • Letter: J
Question
John Petra, a simple Professor of Practice at a local University, has a life long dream of owning a winery. He has studied the soils and topography of both New York State and California. It is obvious that California wine and grapes are superior to those of New York; however, there are certain grapes that are able to be grown in New York such as Riesling and Marquette that do well and have reached world acclaim. The cost of land in California is significantly higher in grape growing regions because of the success of other vintners and as such, John has chosen to purchase a 50 acre plot of land in the Seneca Lake region of the Finger Lakes in New York. The soil is very conducive to growing grapes according to a study performed by Cornell’s agriculture management group. The 50 acre purchase has taken most of John’s available cash and so he may need to take on a partner in this venture down the road. Further, he is always open to bringing on other partners in the venture who can bring expertise that John doesn’t have. John wants to start his business on the right footing and has come to your offices for advice on what type of entity he should form for his new business or businesses.
Discuss in depth, the types of entities that John could form, the advantages and disadvantages of each with particular emphasis on the tax considerations and which one or ones you would recommend.
Explanation / Answer
The types of entities that John could form are:
Soleproprietorship
A sole proprietorship is a simple type of business structure that is owned and operated by the same person. It does not involve many of the complex filing requirements associated with other types of business structures such as corporations. Sole proprietorships allow persons to report business income and expenses on their individual tax returns.
Advantages
Disadvantages
General Partnership
A partnership is an agreement between two or more people to finance and operate a business.
Partnerships, unlike sole proprietorships, are entities legally separate from the partners themselves. In a general partnership, however, profits and losses flow through to the partners’ tax returns.
Each general partner has equal responsibility and authority to run the business. Each partner should be involved in day-to-day operations of the business, and should make management decisions.
Advantages
Disadvantages
Limited Partnership
A limited partnership (LP) is much like a general partnership, but with a few significant differences.
Management of a limited partnership rests with the "general partner," who also bears unlimited liability for the company's debt and obligations. A limited partnership allows for any number of "limited partners," whose liability is limited to the total amount of their investment in the company.
Limited partners are sometimes referred to as "silent partners" - in other words, they can make investments in the company but have no voting power or control over its day-to-day operations. They can be a valuable source of capital in this business structure.
Limited partnership is the entity of choice for many law, accounting and finance firms. It's also a popular among businesses that focus on time-restricted projects, such as real estate and film production companies.
Advantages
Disadvantages
For the protection of the overall integrity of the company, you should create a partnership agreement that specifically outlines what each limited partner can and cannot do when making business decisions.
Limited Liability Company
When looking at business types, many business owners choose to form a limited liability company (LLC). Creating an LLC is a good way to "wall off" your personal assets from your company's liabilities, offering protection for your personal assets in the event of a judgment against your business. For this reason, forming an LLC is a better fit for many owners than a sole proprietorship or a general partnership.
Advantages
Disadvantages
C Corporation
The most common type of corporation in the U.S. is the C Corporation.
By forming a C Corporation, business owners create a separate legal structure that helps shield their personal assets from judgments against the company. C Corporations have a specific structure that includes shareholders, directors, and officers.
Advantages
Disadvantages
S Corporation
Corporations that meet certain requirements can elect an s corporation status with the IRS. This federal tax status enables companies to "pass through" their taxable income or losses to owners/investors in the business, according to their ownership stake in the business.
Advantages
Disadvantages
John could firstly form a sole proprietorship as it is easy to form amd start his business and then he can opt of either LLC or S corporation if he meets the criteria.
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