¶ … purchase of Smithon Manufacturing, Mr. Jones wants to know if he should outright purchase all of the stock.
1(a). Smithon Manufacturing requires new equipment, which will cause debt for the first two years. If Mr. Jones decides to purchase all shares of the company, he will inherit the company's debt. Already the owner of Johnson Services company, one option is to issue debt to pay for the Smithon company. Issuing debt has its benefits, including reduction in taxable income due to issuance of interest payments to debt owners. In issuing debt, Mr. Jones would raise Johnson Services company's debt-to-equity ratio, which raises the chances of bankruptcy and may have difficulties receiving corporate loans in the future (Sharp Investing, 2007).
Mr. Jones wishes to change the structure of Smithon Manufacturing from a C corporation to an S corporation. AC corporation is a separate legal entity, and shareholders have liability protection from debts and obligations. Unfortunately, a C corporation is double taxed; it pays corporate income taxes as well as dividend taxes from shareholders (All Business, 2011). An S corporation passes all federal taxes through their shareholders. The shareholders are required to report all income and losses on their personal taxes. This way, double taxation is avoided (IRS.gov, 2010).
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