With the help of a local stockbroker, Sunrise Chemicals Inc. has formed the Sunrise Chemicals Junior Executives Stock Investment Club to allow junior executive members participate in the stock market. Moreover, the club enables the members to take part in a diverse portfolio of securities that the individual members could not acquire on their own. The initial contribution of Sunrise Chemicals Inc. to the club was $10,000 per unit for ten units. Consequently, the club purchased common stock of Sunrise Chemicals Inc worth $100,000. According to the organizations handbook descriptions, the formation of the club was under an agreement stating that each first participant received one unit of participation for each $10,000 in cash or fair market value of marketable securities that the particular member contributed to the club. Similarly, involvement in the organization is limited to the company and its junior executives. Additionally, new executive members to the club must contribute, in either cash or market value of marketable securities, the carrying amount of the number of units desired, but not less than $10,000 per unit.
The handbook also provides that the books of the club reflect its assets at the fair market value rather than on the cost. The closure of the books occurs at the issuance of new units or with the surrender of existing units for purchase by the club. Additionally, the clubs executive committee assigns groups freely to the junior executives of the company, anyone in the immediate family of the junior executive and to any other person who the clubs executive committee approves. On the withdrawal of a participant, the organization purchases the members units at their fair market value, determined by underlying fair market value of clubs assets. The clubs broker holds the securities purchased or contributed in the street name. Decisions including that of terminating the club, reinvestment, buying and selling of securities are by majority vote of participants with each member having one vote for each unit he or she owns in meetings held twice a month.
Sunrise Chemicals Inc junior investment executive stock club is a corporation. As per the section 301-7701-2 (b) (2), it is an association of members where participation is limited to the company and its junior executives. Therefore, members have limited liability. The company in itself is a legal entity separate from its members. After conducting its business, the club reports its income and expenses from where it realizes net income or loss. The company then calculates its tax on the corporation income-tax-return form, namely, the 1120 form. Consequently, it distributes the after-tax profit to the members.
The benefits of the corporation are subject to taxation when earned. The after-tax profit is then distributed to shareholders as dividends and is subject to tax. Therefore, as per the section 301-7701-1, the income of a corporation is subject to double taxation. According to the handbook, the members of the club suffer from double taxation. Moreover, there is no tax deduction for the business when it distributes the dividend to shareholders.
According to section 301-7701-2, c (1), Sunrise Chemicals Inc junior investment executive stock club can be a partnership because it consists of more than one member and the partners share in the profits of the company through the share of dividends. A partnership consists of two or more members who come together with a similar objective.
The members of the club pay taxes on their individual income on the partnership income taxation. The business is not separate from the owners for tax purposes. Therefore, the profits and losses of the partnership business, the club, pass through the firm to the parties who then pay taxes on their share of the benefits as an individual or personal income tax return. Therefore, the proportion of profits and losses for each member, usually referred to as a distributive share, is set out in the operating agreement.
To conclude, the distinction of a business entity is quite important in understanding how to treat it for tax purposes, that is, whether the company itself pays taxes or whether the tax will be from the income of members. Corporations suffer from double taxation since the income of members is subject to taxation in addition to taxing the business income unlike for partnerships where taxation is only on members income. Similarly, understanding the form of business helps in determining where the liability lies. For some business entities, liability rests with the members while for other entities, and members cannot come in to settle any debts incurred by the firm. Therefore, the terms limited and unlimited liability help in determining where the responsibility lies.
Members with limited liability cannot pay the debts that the company owes from their resources. Notably, this is the case for members of a corporation, who have limited liability, which makes the business entity a legal entity different from the members. However, partnerships have members who are unlimited in addition to the limited members. In other words, those members with unlimited liability can pay for the debts of the company from their resources. However, every business entity has both advantages and disadvantages, and it is up to the members to weigh between these benefits to determine what type of business will be the best to start.
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