Business Analysis: Case 26 US (1361)

A. Business entity
Research shows that Mr. Jones is better off forming an S-corporation opposed to a partnership. 26 U.S. Code 1361 states that an S-corporation is a company that operates domestically within the United States as well as the state in which the Articles of Incorporation are filed. It is more beneficial to be a domestic corporation because home states offer opportunities to reinstate active status to corporations who lapse in registration and taxes. If Mr. Jones fails to pay his annual taxes on time, his S-corporation status can be reinstated after he squares away what he owes within a reasonable period of time. S-corporations are allowed to distribute one kind of stock, but they are limited to having 100 shareholders or less. Mr. Jones is eligible to start his used car dealership as an S-corporation because he is a resident
S-corporations are independent entities, so business-related investments are at high-risk. Limited liability protection focuses more on protecting assets from creditors and suppliers. I highly recommend a business entity with limited liability protection for Mr. Jones because it protects his assets in cases when sales are low and there are not enough business funds to pay his creditors. However, the protection is limited and cannot always protect personal assets. Some businesses require bank loans for start-up and use personal assets as collateral which risk being seized if the loans enter default. Mr. Jones is thinking of using his 401K to fund his new business, but he may also require a loan to cover other expenses. Any personal assets used as collateral like his 401K or dividends income are under protection until he defaults on a payment. Limited liability protection, however, cannot protect against shareholder misdeeds, improper use of accounting, or fraud (Chmielewski 2016) (Schnotz