Identify significant tax and nontax issues or concerns that may differ across entity types and discuss how they are relevant to the choice of entity decision for CTC.

Dawn Contributed FMV Adjusted Basis Ownership Interest Land (held as investment) $120,0 00 $70,000 30% Cash $ 30,0 00 Linda Contributed Services $150,0 00 30% Mike Contributed Cash $200,0 00 40% Working together, Dawn and Linda made the following five-year income and loss projections for CTC. They anticipate the business will be profitable and that it will continue to grow after the first five years. Cool Touch Cookware 5-Year Income and Loss Projections Year Income (Loss) 1 $(200,000) 2 (80,000) 3 (20,000) 4 60,000 5 180,000

 

With plans for Dawn and Linda to spend a considerable amount of their time working for and managing CTC, the owners would like to develop a compensation plan that works for all parties. Down the road, they plan to have two business locations (in different cities). Dawn would take responsibility for the activities of one location and Linda would take responsibility for the other. Finally, they would like to arrange for some performance-based financial incentives for each location. To get the business activities started, Dawn and Linda determined CTC would need to borrow $800,000 to purchase a building to house its manufacturing facilities and its administrative offices (at least for now). Also, in need of additional cash, Dawn and Linda arranged to have CTC borrow $300,000 from a local bank and to borrow $200,000 cash from Mike. CTC would pay Mike a market rate of interest on the loan but there was no fixed date for principal repayment. Required: Identify significant tax and nontax issues or concerns that may differ across entity types and discuss how they are relevant to the choice of entity decision for CTC

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