Paper Example on Recommended Business Entity for Tai-Ga

Introduction

When a new business is in its starting point, there is the need to consider the advantages and disadvantages of each type of business structure since it will have inferences for how your company's profits are going to be taxed. Moreover, when it comes to the period when an individual demands their shares, the business structure will determine whether you are protected or not. Other considerations such as how the new business is to be managed together with the long-term plans that you have will be brought to book as well. In the following paper, the types of business structures and what Tai-Ga organizers should contemplate before going forward with picking one has been outlined. Business structures are mainly incorporated state law; therefore, the details are different from state to state. The models outlined in the case of Tai-Ga are Partnership, S Corporation, and C Corporation. In this perspective, S corporation appears to be the best choice if shareholders are looking for a company structure that provides the benefits of a corporation in conjunction with pass-through taxation.

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Tax Advantages and Disadvantages

There are different forms of business entities that Tai-Ga can adopt. First, the firm can adopt a partnership which is an unincorporated business that is owned by a number of individuals. According to Mancuso (2016), when profits are achieved, they are divided amongst the owners, and their tax returns are reported. Most businesses make use of limited partnerships, general partnerships, limited liability partnerships or limited liability limited partnerships. Even though this form is easier to establish and not taxed separately, that is, each partner in the business files profits or loses based on their individual income tax return (Mancuso, 2016), the business has some tax disadvantages. Notably, when one partner breaches a contract or tort from a third party, the other partners are liable for the action, which is taxed.

The second form of business entity is the S Corporation. On this type of structure, shareholders are not allowed to exceed 100 in number, and the model has one class of stock. There are various advantages associated with this form of a business entity where for example, the income is not taxed based on the corporate level but at the shareholder level. Meaning the S corporation avoids the C Corporation's double taxation (The Editors of Socrates, 2012). Also, the corporation can have an overall lower tax bill since the owner can opt to receive both salary and dividend payments (The Editors of Socrates, 2012). This is because dividends are not subjected to self-employment tax. However, the entity is such that only tax-exempt individuals can be shareholders of the corporate (The Editors of Socrates, 2012).

Tai-Ga can also adopt the C Corporation form of business entity. Once on the business level, profits are taxed, and as if that is not enough, shareholders are taxed on an individual basis when profits are distributed to them. This happens to shareholders who possess limited liability for debts incurred by the business (Kohler, 2015). When the corporation incurs debts, shareholders are not personally liable to them (Kohler, 2015). Shareholders might lose investments after the corporation fails but are not individually responsible for the debts. In terms of disadvantages, shareholders are subjected to double taxation i.e. on the corporate level and when it is distributed out as dividends (Kohler, 2015).

Choice of S Corporation

Of the numerous forms of business entity, S Corp is recommended for Tai-Ga. The S corporation is more attractive to owners of small businesses that are at their initial stages. This structure has interesting tax benefits together with providing you as the owners of the business with the protection of your personal liability (The Editors of Socrates, 2012). The income and losses of shareholders in S corporation are passed to you and after that included on individual tax returns. This means that there is only one level of federal tax that your company is mandated to cater for.

Tax Implications Associated with S Corp

Even though S Corp has been recommended for Tai-Ga, there is a need for shareholders to understand tax implications. Notably, for the S Corp, the income is not taxed at the corporate level. This is usually done at the shareholder level. The implication is that S corporation avoids the idea of double taxation experienced in other business entities such as the C Corp (The Editors of Socrates, 2012). Another important tax implication for Tai-Ga adopting S Corp is that there can be an overall lower tax bill since the owner can opt to receive both salary and dividend payments (The Editors of Socrates, 2012). This is because dividends are not subjected to self-employment tax. However, the entity is such that only tax-exempt individuals can be shareholders of the corporate (The Editors of Socrates, 2012). These aspects are outlined in 26 U.S. Code Subchapter S - Tax Treatment of S Corporations and Their Shareholders.

The Capital Structure of the Business

Capital structure is an important aspect for Tai-Ga especially concerning adopting S Corp. In respect to the value assigned to the organizer's equity accounts versus debt payable to the organizers, there is a need for the company to ensure that the former is greater than the later. In other words, the debt ratio should be less than 1. This means that the amount of equity should be more than the amount of debt. It is cheaper for Tai-Ga to acquire equity that service loans by paying the interest expenses. Therefore, in respect to the ratio, this memo recommends that there should be more equity than debts.

In relation to each of the organizer's cost basis in Tai-Ga, this memo recommends that every individual should contribute to his or her ability. In other words, the company should come up with shares, which are then bought by the different members. The number of shares bought by an individual will determine his or her share in the company; hence, defining and determining the number of profits to be realized if any. This will also help in explaining the level of ownership by the various shareholders or organizers in the company. Hence, for costs, Tai-Ga Company should sell shares to the shareholders based on their ability to purchase.

Discussion

S corporation appears to be the best choice if shareholders are looking for a company structure that provides the benefits of a corporation in conjunction with pass-through taxation. On the contrary, some requirements need to be taken care of to make the election; and for it to remain valid, the election must continue to be met. Settling for S corporation is advisable, but it should be kept in mind that the circumstances that make S corporation favorable are continually questionable to changes in the laws. Therefore, business owners are advised to review the form of business structure they have incorporated from time to time to ensure that it is beneficial to the undertakings of the company.

Adopting Recommendations for Structuring of Tai-Ga

Following the fact that S corporation has been selected as the best business structure choice; it is worth noting that there are various implications based on tax and other operational activities. In the event that the business is formed, there is a need for stakeholders or organizers to make key decisions revolving around inventory cost-flow assumptions, account methods to be adopted, fiscal year periods, and calculations regarding depreciation of assets. On the basis of the analysis and discussions performed in this memorandum, it can be justified that from the numerous inventory cost flowing assumptions, FIFO is the most superior one to LIFO and weighted average. The report also recommends that a hybrid accounting method should be adopted other than the head. From the various depreciation methods, the report recommends that straight-line method of depreciation would be the most idea. Since the proposed structure is S corporations, the report recommends that December 31st should be the fiscal year end considering tax purposes. The report also recommends that Tai-Ga should be prepared in paying corporate taxes.

Inventory Cost Flowing Assumption for a Merchandising Business

Considering that the firm is a merchandising one, there is a need for inventory cost flowing assumption. The main inventory cost flowing assumptions that can be adopted include first in first out (FIFO), last in first out (LIFO), and mweighted average (Simeon & John, 2018). Of these inventory cost flowing assumptions, this report recommends that the merchandising business should adopt FIFO. As the name suggests, FIFO is an inventory cost flowing assumption dictating that the first in are the first to get out. All the inventories that arrive in the business are marked based on their arrival dates (Simeon & John, 2018). During selling, the ones that had arrived first are then released before releasing the ones that arrived later. In other words, for the merchandising business, there is a need to have the inventories that first arrived in the company to be sold first. When the FIFO assumption is adopted, the cost of goods sold is always the lowest (Simeon & John, 2018). With the lowest cost of goods, the profits are expected to be the highest.

On the other hand, LIFO is an inventory management system mainly applied for non-perishable products that have a low turnover rate (Simeon & John, 2018). Despite being an inventory management system capable of matching recent costs against current revenues as well as minimization of write-downs to market, the system has a number of weaknesses as well. The main weaknesses include the ability to reduce earnings, especially during inflationary times, being a system capable of underestimating inventory thereby affecting the financial position of the firm, and the possibility of manipulating income. The idea here is that if Tai-Ga decides to adopt LIFO as an inventory management system, the possibility of having inaccurate figures that will reflect the actual position of the firm is very high.

The weighted average is another inventory management system that Tai-Ga can adopt for purposes of ensuring that it adequately measures available inventory. The inventory management system of the weighted average is very ineffective and inefficient considering the assumption that all inventories within a company are likely to be sold simultaneously, which not a possible reality. Regarding the cons, weighted average inventory management system whereas prices are supposed to be used in valuing inventories, it is important to note that such prices under the weighted average cost method do not have direct link or relationship to other prices (Simeon & John, 2018). In addition, unlike the other two, LIFO and FIFO, the weighted average cost model is very difficult to perform. The model is a very expensive one.

The above sections have provided a better understanding of the various options that Tai-Ga can adopt for purposes of managing its inventory. However, the present report recommends that the merchandising business should adopt the use of cash only to buy goods. FIFO inventory cost is flowing assumptions in order to record the highest profits. Furthermore, FIFO has advantages of easy to apply, assumes flow of costs with the normal flow of the actual physical goods, the impossibility of manipulating income, and portraying the current market value within the balance sheet.

Overall Business Accounting Method

For a merchandising business, options for accounting methods are cash, accrual, and hybrid. There...