Question

Carol and her friends are creating a new company that ships monthly subscription boxes filled with beauty products to customers. Carol has multiple partners and she wants to avoid both double taxation and personal liability at the same time. In addition, she wants to pay the partners based on their company ownership percentage. Carol can accomplish her goals by forming what type of business entity?

Answer 1

Carol can best meet her business requirements by creating a Limited Liability Company (LLC), as it avoids double taxation and offers personal liability protection while allowing profit-sharing based on ownership percentage.

Step-by-step explanation:

To avoid both double taxation and personal liability while being able to pay partners based on ownership percentage, Carol can accomplish her goals by forming a Limited Liability Company (LLC). An LLC combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. The profits and losses of the business are passed through to its owners (called members), who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, although some states impose an annual tax on LLCs.

Unlike a sole proprietorship or general partnership, where the business owners can be held personally responsible for the company's debts and liabilities, an LLC provides its owners with personal liability protection. This means Carol and her partners would not be personally liable for the debts of the business. Additionally, as in a partnership, they can decide to distribute profits in proportion to their ownership interests in the LLC.

However, it is important to note that the process of establishing an LLC is more complex and may involve additional costs compared to a sole proprietorship or general partnership. Carol must file articles of organization with the state and uphold any other state-specific requirements. Despite this complexity, the advantages of an LLC often outweigh the disadvantages for business owners looking to protect their personal assets and avoid the double taxation characteristic of traditional corporations.

Answer 2

The correct answer is S corporation.

Step-by-step explanation:

Carol and her friends are creating a new company that ships monthly subscription boxes filled with beauty products to customers.

Carol has multiple partners and she wants to avoid both double taxation and personal liability at the same time.

She also wants to pay the partners based on their company ownership percentage.

She can do all this by forming an S corporation.

A corporation is a business entity that is separate from its owners. The owners do not have personal liabilities for the debts of businesses.

An S corporation is a type of corporation which fulfills specific Internal Revenue Code requirements. It is a small business with 100 or less than 100 shareholders. It gives limited liability benefits to a corporation and is taxed as a partnership. It can also pass income directly to shareholders and avoid double taxation.