Aubrey Richards and Tashi Pasang Would Like to Start a Business

Aubrey Richards and Tashi Pasang would like to start a business in 2021 with equal contributions of $75,000.They will split any profits and losses equally.Aubrey and Tashi would like to know whether a partnership or a corporation would be the best form of business strictly from a tax perspective in light of other income to be received in 2021.Neither would not take any form of payment from the company in the first year.
The following information (which is the same for both Aubrey and Tashi) is available for 2021 projections:
Employment income = $100,000
Interest income = $5,000
A business loss of $25,000 is anticipated in Year 1 for the new company.
Aubrey and Tashi both have a personal marginal tax rate of 45%.The small business corporate tax rate is 12%.
Required:
Which form of business will be most beneficial to Aubrey and Tashi from a tax liability perspective in Year 1?

Correct Answer:

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