Question

Renella is an entrepreneur who likes to be actively involved in her business ventures. She is going to invest $500,000 in a business that she projects will produce a tax loss of approximately $125,000 per year in the short run. However, once consumers become aware of the new product being sold by the business and the quality of the service it provides, she is confident the business will generate a profit of at least $200,000 per year. Renella has substantial other income (from both business ventures and investment activities) each year. She will be the sole owner of the business. Advise Renella on the business form she should select for the short run.

Answer 1

The primary objective of Renella is to pass through the losses and offset against her other income. As she is the sole owner of the business, the various forms of business available to her are sole proprietorship, limited liability company (LLC) and the S corporation. These three forms of business will allow her to pass through the losses and offset against her other income. However, when the business starts making profits, each form will result in single taxation. It is recommended that Renella either sets up LLC or S corporation as these two have limited liability advantage compared to sole proprietorship.