Reference no: EM131565872
Problem -
Bill and Kerry plan to open a limo service for the Miami Dade area after they buy and renovate two 15 passenger vans purchased recently at an auto auction in Delray Beach, Fl. Bill is a licensed commercial driver, but is not knowledgable on business formations, and Kerry has experience as a bookkeeper. Kerry plans to keep her current job with Sunshine foods, inc. but will moonlight with the company when necessary. Their initial projections are that they will lose $35,000 in 2017. They have also paid cash for the two commercial vans ($10,000 each) and had to pay $1,000 to the port of Miami to receive a commercial permit valid through 7/31/2020.
To fund operations so far Bill has taken out a second mortgage on his personal residence for $70,000 and deposited the full amount into the company's bank account. Kerry has not contributed any money to the company, but has offered to work on the company's accounting books for 'free' until a point in time when the company has enough money to pay her.
a. List advantages for operating this business as a partnership instead of a corporation and state your recommendation as their CPA for business entity formation including % allocation if your advice is a partnership (please also state whether you believe they should set up as a general or limited partnership in your opinion)
b. As the CPA for Kerry and Bill, what will Bill and Kerry recognize for taxes, assuming they accept your recommendation for entity formation as stated in part A in 2016?
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