Assignment 1: Client Letter

April 18, 2013

Willow Wood

3456 Client Lane

Lavender, RI. 25698

Dear Mrs. Wood:

It was wonderful seeing you at the small business seminar on April 4, 2013. I hope you enjoyed the seminar and were able to get some important information out of all of the presentations that were given.

In our meeting on April 10, 2013, you discussed with us that you and your four other investors are looking into starting a small retail business and would like to know if starting this business as an S corporation would be the best choice.

In my research, I have discovered the advantages and disadvantages of electing S Corporation for your status. The advantages include: 1) Protected Assets. An S corporation protects the personal assets of its shareholders. The shareholder is not personally responsible for the business debts and liabilities of the corporation. Creditors cannot pursue the personal assets (house, bank accounts, etc…) of the shareholders to pay the business debts. In a sole proprietorship or general partnership, the owners and business are legally considered the same where it leaves all personal assets vulnerable. 2) Pass-through taxation. What this means is an S corporation does not pay federal taxes at the corporate level. Any business income or loss is “passed through” or should say “passed on” to the shareholders who must report it on their personal income tax returns. This also means that any business losses can offset any other income that is on the shareholders’ tax return which can be very helpful in the startup phase of a new business. 3) Tax-favorable characterization of income. The shareholders can be employees of the business and draw salaries as employees and also can receive dividends from the corporation. Receiving the salary or dividends can help the owner-operator reduce any self-employment tax liability while still generating business expense and wages paid deductions for the corporation. 4) Straightforward transfer of ownership....