Sunrise Chemicals Inc has cooperated with a stockbroker to form a business entity, namely, Sunrise Chemicals Junior Executives Investment Club. The sole purpose of the club is to enable the companys junior executives to invest in the stock market and to participate in a portfolio of securities where each new member needs to contribute to marketable securities. According to the case study, each junior executive needs to provide a minimum of $10,000 per unit to share in the profits and losses of the company. It is important to note that, the rules limits participation in the business entity to Sunrise Chemicals Inc and the junior investors. Nevertheless, the stockbroker carries on a profit-making business for the benefit of the junior executives.
All decisions of the entity are made by a majority vote of the participants. In other words, the more the units a member has, the more the voting power bestowed on him or her. Notably, decisions in Sunrise Chemicals Junior Executives Investment Club include purchase or sale of stocks, reinvestment of sale proceeds, disbursement of dividends, termination of the entity, and distribution of assets after a termination. Notably, the primary incomes of the club include sale proceeds from stocks and dividends arising from the securities held by the stockbroker on behalf of the junior executives. The junior executives share the profits and losses that result from the business activities as per their ratio of contribution.
Sunrise Chemicals Junior Executives Investment Club as a Corporation
According to the code 301-7701-2, a business entity is a unit identified for federal tax function. The business entity can either be a partnership or corporation. A corporation is the business entity that has wholly owned by a state, an insurance company, an association, a joint-stock company or one that is taxable as a corporation under the Internal Revenue Code provision. Sunrise Chemicals Junior Executives Investment Club is an association of junior executives of Sunrise Chemicals Inc. It can, therefore, be termed as a corporation based on the definitions of a corporation as defined in the code 301-7701-2 paragraph (b) (2).
It is also important to remember that the stockbroker holds the securities in trust for the benefit of the junior executives. Consequently, one can refer to the entity as a business trust as defined in the code 301-7701-4 paragraph (b). Nevertheless, the fact that the junior executives do not supply the corpus of the trust is not reason enough to classify the entity as an ordinary trust rather than as a corporation.
The Clubs Income
According to the case analysis, the Sunrise Chemicals Junior Executives Investment Club carries on business with a goal to make profits. The primary sources of income include the sale proceeds from the stocks and the dividends arising from the securities held by the stockbroker. Consequently, the club reports its revenue and expenses from where it realizes net income or loss. The company then uses 1120 form to calculate its tax, which is the corporation income tax return form stipulated by the federal law.
Taxation of the Corporation Income
According to the code 301.7701-1 paragraph (a) (2), there is a classification of the determination of whether a business is a separate entity for federal tax purposes or not. According to this paragraph, a joint-venture may create a distinct entity for federal tax purposes if the participants carry on a business and share profits earned. The owners of the club are the junior investors in Sunrise Chemicals. They share the profits and losses that arise from the business activities according to their share of contribution. Therefore, the club becomes a separate corporation from the participants. Consequently, it is liable to corporation tax as required by the federal law. Similarly, the junior executives are subject to tax on their incomes. Subsequently, the entity suffers from double taxation.
Sunrise Chemicals Junior Executives Investment Club as a Partnership
The code 301-7701-2 in paragraph (a) classifies a business entity with more than two members for federal tax purposes as a partnership. Section c of the same code and paragraph (a) in code 301-7701-3 second this notion. Apparently, Sunrise Chemicals Junior Executives Investment Club consists of many junior executives who join the entity by contributing a minimum of $10,000 per unit. Consequently, these participants vote on the main activities of the club according to the number of units each has. Additionally, the partners share profits and losses arising from the business ventures according to their share of contributions.
Taxation on the Partnership income
According to the federal law, a partnership is not a separate entity from its participants. Therefore, the entity is not subject to any federal tax. Nevertheless, the partners are eligible to tax on their share of profits and losses.
To conclude, Sunrise Chemicals Junior Executives Investment Club has the option to elect whether to exist as a corporation or a partnership. Clearly, as a corporation, it will have double federal tax liabilities whereas as a partnership, only the participants will be eligible to tax. Furthermore, their choice will play a big part in maximizing profits for the junior executives. It is recommended that the club operates as a partnership to minimize tax that would have been charged as corporation tax.
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