Question

This is a TAX question for a class on pass-through entities:

What form of entity provides the most complete limited liability protection for four individuals who wish to join together in a single firm to operate an accounting practice, and why?

Answer 1

A business can be structured into several basic forms. The simplest, the sole proprietorship, has one owner who pays personal income tax on profits and is personally responsible for any liabilities. In a partnership, two or more owners share profits or losses. Unlike corporations, partnerships don't incur taxes on profits before they are distributed to partners. A disadvantage of partnerships is that they can expose the owners to personal liability. A corporation is a legal entity distinct from its owners, limiting the owners' personal liability. Through stock, corporations provide a readily transferable means of ownership. Corporations have a tax disadvantage, as the corporation itself is taxed on its profits, which are then taxed again when stockholders receive income in the form of dividends.