Tax Policy and the Economy

QUESTION

Tax considerations affect whether one chooses to do business as a certain form of business organization. Using an analysis of the three major business forms—sole proprietorships, partnerships, and corporations—figure out what form would be most advantageous financially to use assuming that each one of them had an annual income of $100,000. The analysis must include: formation and operation, risk/liabilities, tax treatment of parties involved, and dissociation and dissolution. What steps could one take to minimize the amount of federal income taxes imposed upon each type of business enterprise?

When writing your paper use the following guidelines:

The body of your paper should be 750-1,000 words in length (not including front matter or end matter like the cover page, abstract, reference); in 12 point font, and single or double spaced.
At least 2 external, quality research sources must also be consulted, and referenced in the text and cited in the Reference Page.
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Meets word count requirement; (750-1,000 words in the body + a Cover and Reference Page)
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Includes thoughtful analysis and commentary on the provided article plus the outside source you find to answer the proposed question(s).
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ANSWER

     The choice of business based on risks and tax implications

The tax implications differ from one operating under the sole proprietorship, a company or in partnership. A sole proprietorship is a form of business that is operated and run by one individual who is the owner (Ross, Westerfield, & Jordan, 2008, p.9). Most of the contributions come from personal savings. The business and the owner is the same person. The sole proprietor business exhibits various risks and liabilities. First, in the case of dissolution and the business is unable to pay its debtors, the owner personal belongings are auctioned to cover the business debts. Secondly, if the owner falls sick, then the business ceases to operate for that period, and the owner might run into losses. The business cannot claim for input taxes from the federal tax system because the business income is declared under the owner personal income assessment form. The business operates on a small scale; thus cannot negotiate for favorable prices of commodities supplied from its suppliers. The partnership is a business run by several persons who have common goals and interests (Ross, Westerfield, & Jordan, 2008, p.10). The partners pool their resources together to start and run the business. The various partners are assigned duties and responsibilities depending on their contributions and agreements in the partnership contract. The different partners include an active and a dormant partner. An active partner is the one involved actively in the running affairs of the partnership while the dormant partner contributes to the start of the partnership business, but does not involve him/herself in the business operations. The partnership business has risks and liabilities. The business partners might disagree on certain matters, therefore, leading to wrangles which negatively affect the business. If the partnership is not registered as limited, then the partners are liable to the extent of personal items if they run into debts and the business is dissolved. The dissolution process of partnerships ends in tussles among the partners which makes it tedious, expensive and distasteful. Partnerships do not receive tax benefits such as VAT claims. Most of the partners are taxed in their accounts.  Corporations are bodies established through the Companies Act and are recognized in the law (Ross, Westerfield, & Jordan, 2008, p.11). The companies are limited liabilities which means that they are artificial persons established by law. The owners are liable to the extent of the shares they hold in the corporation. Corporations are taxed more as compared to sole proprietorships and partnerships. The taxes charged are separated from the owners and the business (Cooper et al., 2016). The owners file their returns which are different from the company returns. In the case of dissolution, the owners are the last one to be paid. The lenders might lose their cash if in the event of a corporation is declared bankrupt and the assets available are not enough to recover the loaned amounts. Tax Policy and the Economy

The federal rule of taxation regulates tax matters for the three types of businesses. First, the sole proprietors fall under the income taxation rule and also the partnership is taxed according to the income tax schedule. The company is taxed under the income tax; value-added tax and corporation tax schedule (Cooper et al., 2016). In the case of each business making $100,000 each month, the businesses will be taxed differently on the amount. The sole proprietor will file the amount under his/her annual income declaration form. In a partnership, the amount will be divided on equal proportion or depending on the ratio agreed by each partner, then declared on the individual income of each partner before income tax is charged. In corporations, the amount is taxed under corporation tax. If a portion of the amount is declared as dividends to the owners, the dividend income will be taxed on the individual annual income declared for that period. The VAT amount on the $ 100,000 income must also have been declared either on a monthly, quarterly or yearly basis. Tax Policy and the Economy

The discussed tax rates and implications affect whether an individual will choose either of the three businesses. Also, the availability of legal means of reducing the tax liabilities will make a person to go for a certain business over the other. The tax avoidance measures such as deduction from mortgage interests and contributions to charitable organizations will help to reduce tax obligations (Braithwaite, 2017). Ensuring that one deducts the expenses incurred in the running and operation of the business decreases the tax required to pay by federal. Operating business branches in tax haven states will also reduce the tax payments of an individual business. Tax Policy and the Economy

In choosing a business, if a person considers tax implication in deciding which form of business to enter, then sole proprietorship and partnership are suitable because the businesses have fewer taxation rules. The less the taxes involved, the more profit the business will make. The main tax required by the federal law to be paid by partners and sole proprietors is the income tax which is calculated on a graduated scale rate. The higher the income earned by an individual, the more tax he/she pays. The income a company makes is subject to several taxes which reduces the income that trickles to the owner (s). The other implications to consider is the risks involved, especially in the cases of dissolution. Corporations are the best forms of doing business because in the event they are dissolved, the owner’s assets will not be sold to cater to the business liabilities. Separate independence exists between the owners and the business as established in the case of salmon vs. salmon limited, where the owner salmon was exonerated from liabilities the salmon company limited owed its suppliers.

References

Braithwaite, V. (2017). Taxing democracy: Understanding tax avoidance and evasion. New York: Routledge.

Cooper, M., McClelland, J., Pearce, J., Prisinzano, R., Sullivan, J., Yagan, D., … & Zwick, E. (2016). Business in the United States: Who Owns It, and How Much Tax Do They Pay?. Tax Policy and the Economy30(1), 91-128.

Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance. Toronto: Tata McGraw-Hill Education.

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