MBA 660: 7-2 Business restructuring recommendations
Date: May 2, 2022
To: Owners of Tai-Ga
From: The Tax Advisor
Subject: Business Restructuring Recommendations.
Change of entity is concerned about change of business ownership. A business always wants to make the best decision that will benefit all the stakeholders. Furthermore, a business must ensure that stock ownership seeks to benefit everyone. Stakeholders must ensure that they are benefiting from stock ownership. A business must make investment decisions where all stakeholders are able to benefit. The percentage of ownership interest in business is in relation to the percentage of stock a shareholder owns. Shareholders must make sure that they make decisions where they can benefit financially. In addition, stakeholders are more concerned with stock transaction tax. When selling securities, investors or stakeholders must choose between paying 20 percent of the profits from sale or to pay one percent withholding tax on the value of the sale. If investors choose to pay one percent withholding tax, the combined transaction tax is increased to 1.3 percent. Therefore, investors are more interested in stock transaction tax where they can save the most and incur more profits. In addition, investors seek to avoid being taxed twice when they sell stock. Therefore, Tia-Ga stakeholders will seek to choose stock transactions where they pay more tax. By changing the business ownership, Tai-Ga will have much impact on how much it pays in terms of taxes. A partnership business is taxed as the same as sole proprietorship. Partners are regarded to be the same tax entity as the business itself. Partnership business is pass through tax entity, which means the business itself does not pay income taxes. The business skips tax liability â€œpasses throughâ€ taxation requirements. In partnership business, partners pay tax based on how much the partners earn (Thuronyi, 1998). They are responsible for paying their share of business pass through income. Partners must include taxes and debts on their personal income tax returns. This means that the amount paid by the business in the form of taxes will be focused on the amount partners earn from the business. partners are considered as self-employed and thus they must pay self-employment taxes.
The right type of partnership business can maximize savings on tax because it depends on how much the business is taxed. Certain types of businesses are best in relations to tax benefits. A business must register a business type that saves on taxes. Partnership business can be registered as limited liability company (LLC) which is more preferred by certain professionals. Tai-Ga can leverage on LLC to enjoy tax discounts associated with this type of business. LLC business has more flexibility because shareholders are able to file a partnership, where members are able to enjoy 20 percent pass through deduction if stakeholders accept to be taxed as a pass-through, which largely depends on the level of income of the business (Thurony, 1998). Therefore, even though majority of states do charge annual minimum taxes on LLCs, it is often insignificant and thus a business is able to save on taxes. Tax saving is major factor to consider when choosing a corporate entity with asset protection behind it.
The concept of income multiplier plays a critical role in investors understanding whether to stick with a company or to sell their shares. It is one of the underpinning principles of Keynesian economics. Income multiplies is about a dollar spend turns into more money. The best way for major suppliers for Tai-Ga to enter in business with the company is by buying a 10 percent of shares of the business. In this way, the suppliers will be able to benefit from the business if it makes profits. Also, the investors will be in a position to make critical decisions related to the business because of having significant shares to the business. Based on the given details, Tai-Ga is projected to experience potential financial growth (Thuronyi, 1998). Therefore, purchase of the companyâ€™s stock by Brian is a potential investment. By buying 2 percent of the business, Brian will be able to benefit from the growth of the business. Based on debt-to-equity ratio of Tia-Ga, Brian can understand the potential risks associated with the business and whether to buy stocks of the company. A small business with only owner pays a tax of 13.3 percent on average while business with more than one owner pay 23.6 percent on tax. On the other hand, small corporations known as s corporations pay an average of 26.9 percent. Therefore, rather than being the owner of the business through partnership, it is imperative to buy stock of the company. Always, businesses to ensure that they enjoy tax benefits as possible. Tai-Ga income stood at $17.5 million. However, 5 million dollars of the business invested in inventory and other operating assets. Therefore, based on the earnings, LLCs type of business would be perfect for Tai-Ga business. based on the two percentages, a business can understand whether it is able to benefit from a given tax option. Business tax is based on its income. The reason for partnership business is that shareholders are not required to pay for income tax but to pay tax for profits passes through the owners and partners. Partnership is often viewed as an extension of its owners and helps partners not to bear the burden for tax.
Thuronyi, M. V. (1998).Â Tax Law Design and Drafting, Volume 2Â (Vol. 2). International Monetary Fund.