Running head: TAX RESEARCH MEMO 1

Tax Research Memo

Student’s Name

Institutional Affiliation
TAX RESEARCH MEMO 2

Tax Research Memo

To

From

Cc

Date

Re:

Introduction

In your recent visit, you expressed your desire to know which is the best entity to form

now and in the future. In this light, you requested me to advise you on the specific business

entity that would best fit your requirements, and more so in the State of Florida. Accordingly,

this memo serves as my formal advice of why you should consider establishing a Limited

Liability Company over all the other available entities in Florida.

Facts

See facts in a separate memo

Issues

a. Types of entities that can be formed under the Florida Law.

1. Sole Proprietorship

2. Partnership

3. S Corporation

4. C Corporation

5. Limited liability Company

b. My recommended entity now and in the future.

c. Financing and tax accounting methods to consider.

Law

The Florida Business Corporation Act stipulates the type of business entities investors

may incorporate in Florida. These various alternatives define the manner in which the

prospective business will interact with the law, the Florida Division of Corporations, and the

Internal Revenue Service (IRS). You can choose from a sole proprietorship, Limited Liability

Company, partnership, C Corporation, and S Corporation.

1. Sole Proprietorship

A sole proprietorship is the type of business entity that is characterized by a single owner

who assumes the business’s liabilities as well as debts. For tax purposes, such an unincorporated

business, as well as its one owner, are taken as one. A sole proprietor is the cheapest and least

intricate model of business formation because it does not need formal paperwork in setting up, or

require to be listed with the state. Furthermore, income is usually not filed separately as it is in

corporations. Another advantage of this type of entity is that it gives the owner full control of

every decision relating to the business. One is not mandated to consult with others when making

changes or other vital; decision. However, it has the demerits of unlimited personal liability,

difficulties in raising funds, and incurring losses alone. This type of entity is impractical in this

case because there is more than one shareholder involved.

2. Partnership

Partnerships, like a sole proprietorship, are some informal business entities that the State

of Florida offers different investors. In such a body, partners are not necessitated to hold any

general meetings, elect officers, prepare minutes or issue some stock certificates. Usually, they

share the management duties of their business, the profits, losses, and responsibilities for

liabilities and debts. For tax purposes, this entity is not seen as separate from the partners.
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Therefore, the partnership does not owe the state any income tax; rather, it passes them to each

of the partners FL Stat § 620.8306 (2016). They report their share of losses and profits on their

respective federal tax returns. FL Stat § 605.0108 (2016), however, provides an exception to this

under limited liability partnership. In your scenario, this entity is not feasible because raising

capital for you is going to be a problem with this type of entity.

3. S Corporation

S-Corporation is a type of corporation which differs from its C counterpart because of its

ability to circumvent double taxation. It does so by safeguarding itself from being charged an

income tax on its profit when the shareholders pay the same. Consequently, an S corporation is a

pass-through entity. FL Stat § 607.0202 (2018), stipulates that an S corporation in Florida

necessitated the filing of Article of Incorporation with the Secretary of State. While it offers a

positive tax treatment to its less than 100 shareholders, it has limits as far as foreign ownership is

concerned.

4. C Corporation

A C corporation in Florida like in the rest of the United States is one of the businesses

entities that are not only regulated but also formed on the state level. In comparison, to the S

corporation above, it pays taxes first at the corporate level and then at an individual level. In the

latter, the individual shareholders part with taxes on any dividend that the C corporation pays

them at the end of a financial year. Doing so exposes the shareholders to the risk of double

taxation. FL Stat § 607.0202 (2018), also holds that a C corporation is created by filing with the

Secretary of State the Article of Incorporation.

5. Limited liability Company

A limited liability company is a crossbreed between a limited partnership and a

corporation. Like the C and S-corporations, a limited liability company requires the filing of

Article of Incorporation with the Secretary of State. However, it often takes the form of an

Article of Organization, FL Stat § 605.0108 (2018). LLC provides greater flexibility with the

added advantages of a partnership, especially when it comes to the limited liability and

management of LLC. The flexibility of the LLC also extends to the fact that it is possible to elect

to have S-Corporation treatment, thereby avoiding the risk of double taxation.

The LLC is the type of Business entity I would recommend to consider now and in the

future. When forming this entity, the other document that you require apart from the Article of

Organization is the shareholder agreement because it shows when and how dividends will be

issues, type, and value of the share. Such information is important in deciding how and who to

tax. Meeting minute and operating agreement are also important because they set out the

businesses structure and its operation. The former is also important for it is a record of how

important decisions that may have a huge implication of profits and losses were made.

Given the diversity of resources that are currently available to all the shareholders, I

would suggest that you consider a mixture of both equity and debt financing. As you said, none

of you particularly has deep pockets, and therefore you will likely have to borrow some funds, a

factor that makes debt financing an alternatively. Nonetheless, you still have some other sources

you can exploit for equity financing. The fact that you do not have a lot of money with you

means that you should consider cash accounting over accrual because it will allow you to

recognize income at present but defer tax payment so that you may enjoy the advantage of

retaining the tax dollars for growth’s sake.

Conclusion
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To conclude, a Limited Liability Company is an entity that best fit for your situation

because it considers the diversity of shareholders, tax requirements, capital structure, and need to

maintain a presence both in the US and abroad. Unlike Sole proprietorship and partnership, an

LLC provides you with the benefit of not being liable on a personal level for any of the entity’s

actions. This limited liability means that all your personal assets are safeguarded by this

businesses set-up. Nonetheless, this benefit is also provided both by the S corporation and C

corporation.

The S corporation and C corporation, however, have some tax and ownership limitations

that make them less desirable considering the facts of this case. For instance, the biggest

shareholder in your proposed organization is Mencius Gong Bao-Ji Ding, with 35% ownership.

However, he is a foreign, given that in spite of having a working permit, he does not have a

Green card. Therefore, he does not qualify to be an owner of the S corporation. However, LLC

provides him with foreign ownership rights. While he can own C corporation, this type of entity

goes against your wish for having a single level of taxation. C corporation will expose you to the

risk of double taxation. This means that the business entity is taxed first at the corporate ladder,

and later, the shareholders are taxed on their respective personal return. Such taxation occurs

especially when dividends are involved. An S Corporation, on the other hand, can shield the

shareholders from this double taxation, which is also present in a Limited Liability Company.

Fortunately, FL Stat § 607.504 (2018) makes it possible to circumvent this problem by

Filing Form 2553 with the Internal Revenue Services, which effectively makes the S-

Corporation benefit available to all shareholders including the Foreign one. Accordingly, the

Limited Liability company provides more tax flexibility, minimum filling, in addition to being

less intricate than the sole proprietor, S corporation, and C corporation.

References

2014 Florida Statutes (n.d.).:: TITLE XXXVI - BUSINESS ORGANIZATIONS ::

Chapter 607 - FLORIDA BUSINESS CORPORATION ACT :: Part I - GENERAL

PROVISIONS (ss. 607.0101-607.193) :: 607.0120 - Filing requirements.

2018 Florida Statutes (n.d.). Title XXXVI - Business Organizations :: Chapter 605 -

Florida Revised Limited Liability Company Act :: 605.0108 - Nature, Purpose, and

Duration of Limited Liability Company.

Chapter 620 Section 1201 - 2018 Florida Statutes. (n.d.). Retrieved from

http://m.flsenate.gov/Statutes/620.1201

Florida Revised Uniform Limited Partnership Act of 2005.