Question

Sandi and Walter want to go into business together and plan on offering a tutoring service to high school and college students. They plan on hiring 5 employees for the business. Sandy proposes that they form a corporation for this purpose in order to reduce their personal liability against lawsuits filed related to the business. However, Walter is concerned about being able to pay their debts because they will have to rent tutoring space, purchase computers and supplies, and pay the employees. He wonders if they will have to pay more taxes if they form a corporation on top of all these expenses. Sandi says forming a corporation would likely result in double taxation.

Is Sandi correct that forming a corporation would likely result in double taxation?a) Yes, Sandi is correct because the corporation would be required to pay tax on its profits, and the owners/shareholders would also be required to pay income taxes on dividends.b) No, Sandi is incorrect because all businesses are taxed in the same manner.c) No, Sandi is incorrect but only because the law involving taxation of corporations does not apply until there are at least 10 shareholders or 10 employees.d) Yes, Sandi is correct but only because Walterâs proposal does not involve a writing and the filing of paperwork with the secretary of their state.

Answer 1

The options do not match the case, since Sandi proposed the corporation and Walter is having second thoughts about it due to corporate taxes.

Walter might be right or wrong depending on the type of corporation that they choose to form. If they choose to form a S corporation they will not be double taxed, since S corporations are pass through entities. But if they choose to form a C corporation, then they will be subject to double taxation since the C corporation will have to pay income taxes and Sandi and Walter will also be required to pay income taxes.

Both C and S corporations provide their stockholders limited liability, so neither Sandi or Walter will be personally liable for any obligation that the corporation may acquire or be imposed to (e.g. lawsuits).