Your Client Has Operated a Sole Proprietorship for Several Years

question 79

Essay

Your client has operated a sole proprietorship for several years, and is now interested in raising capital for expansion. He is considering forming either a C corporation or an LLC.
a. Describe the treatment of an LLC and discuss any advantages the LLC offers over the C corporation.
b. Assume instead the client has previously operated as a C corporation. Describe the tax consequences of converting to an LLC.

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Definitions:

Inferior Good

A type of good for which demand declines as the income of individuals or the economy increases, opposite to normal goods.

Substitution Effect

The change in consumption patterns due to a change in the relative prices of goods, leading consumers to substitute a cheaper good for a more expensive one.

Income Effect

The alteration in a person's or an economy's earnings and the effect this alteration has on the demand for a product or service.

Price Change

An alteration in the cost of goods or services, which can go up or down, depending on various factors.