Tax Research Memorandum
Name:
Institution:
Tax Research Memorandum
To: Tax Manager
Date:
By: STUDENT’S NAME
Re: Incorporating a Sole Proprietorship Business to a Corporation
Facts
Mimi Charpentier is a sole proprietorship business that runs a cupcake shop in three different areas within Las Vegas. The business does not have an inventory and operates on a cash basis. One of the three stores is slightly larger than the other two and acts as the kitchen site. Trucks pick the merchandise daily and supply them to the respective clients. Gloria Wills, an attorney of Mimi, advises her to think through incorporating the cake business as a corporation. After a long period of thinking through the idea, Mimi concurs, and the activity is scheduled for July 1st.
They agree to distribute the shares as follows: Mimi Charpentrier gets 60 per cent of the share while her daughter Nancy Charpentier and Joan Price the chief financial officer each get 20 per cent of the remaining 40 per cent. After the incorporation of the company, it was noted that Mimi was only left with two years of life expectancy.
Since the business operates on a cash basis, it currently does not have any debts, and also Joan and Nancy do not have any projection of extending the business beyond Las Vegas. Moreover, due to the gross receipts, Mimi is unlikely to adjust from the existing cash basis of book-keeping.
Issue 1
When the business adjusts from being a sole proprietorship to a corporation which tax liabilities are likely to be affected and will it be achievable to fit comfortably to the new taxation?
Conclusion
The business was initially operating as a sole proprietorship. Therefore, they used to list the business profit and losses data on Schedule C then the form is submitted to the IRS along with 1040. All expenses of the company were filed separately from the business owner. Therefore after incorporating the business, the new corporation will be mandated to file tax from the business independently.
Analysis
As a sole proprietor, the business and the owner are considered to be one except for a corporation, where the entity and the owner are considered separate. Therefore it would be very beneficial if Mimi incorporated the business because currently when the cupcake business incurs losses, she will have to compensate it thus risking losing her personal property.
A corporation considered an entity that stands on its own can be sued and can sue and also it is allowed to start a business on its own. For that reason, Mimi will not be required to pay tax on the earning of the corporation apart from when the money is compensation for services rendered such as bonuses, dividends and even salary. On the other side, the corporation will be taxed on all its profits.
According to tax laws and regulations such as the Tax Cuts and Jobs Act, the corporation tax rate has to be significantly altered into a single flat tax of 21 per cent. Due to this fact, the process of Mimi adjusting to the new taxation will not be seamless because corporation taxation is more complicated than taxation of a sole proprietorship.
Issue 2
In terms of asset contribution, what will happen to the owner of possessions such as land and building, will Mimi keep them as Duvall MD claims or will they be moved to the new corporation?
Conclusion
Gloria, the attorney, will be expected to change the title of the asset to a new corporation. As a sole proprietor, the asset is currently considered as a business asset, and therefore the assets will have to be transferred to a new corporation despite Duvall MD claims. Moreover, while selling the assets to the new company, they will have to be taxed, and they will be in the form of preferred stock or common stock.
Analysis
Based on section 315 (a) General rule it is stated that” No gain or loss shall be recognized if a property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation. Immediately after the transaction, such person or persons are in control (as defined in section 368(c)) of the corporation.” Therefore, Mimi will be required to transfer the business assist to the new company in exchange for common stock or preferred stock and also she will control the company as the main shareholder. Duvall’s explanation does not accord to section 351 since she argues that after transferring the assets to a corporation, Mimi still retains the ownership.
Issue 3
Considering that Mimi has two years left since the incorporation of the business, what will happen when she dies?
Conclusion
Since the new corporation operates separately from owner unlike in sole proprietorship the business will continue as usual even after the death of Mimi.
Analysis
In this case, the court orders a corporate veil to be applied. The corporate veil ensures that there is a legal separation of the business from that of the company’s operations. As a result, the death of Mimi will not bring to an end the activities of the company even after the owner dies. However, if she fails to incorporate the business her death with bring to an end her business. The corporate veil gives an amicable solution to the matter.