Chance is planning to invest $20,000 in a venture whose management is undecided about whether to structure it as a regular corporation or as a partnership. Chance will hold a 10% interest in the entity. Determine the treatment to Chance if the entity is a corporation and if it is a partnership. Charles is in the 37% marginal tax bracket. Also, assume that the passive activity rules do not apply to Chance. Explain. Depending on your answer, why is one alternative better than the other.
If the entity incurs an $80,000 operating loss in year 1, what is Chance’s cash outflow if the entity is a corporation? A partnership? Do not consider the 3.8% additional tax on net investment income in the analysis. Explain. Overall, is a corporation or partnership better for Chance? Explain.