256 Planning and Forecasting
expenditures for word-processing equipment and office furniture, the corpo-
rate form would afford them access to the lower corporate tax brackets for
small amounts of income (unless they were characterized as a personal service
corporation). Furthermore, if the consultants earn enough money to purchase
various employee benefits, such as group medical insurance and group life and
disability, they will qualify as employees of the corporation and can exclude
the value of such benefits from their taxable income, while the corporation
deducts these amounts.
These positive aspects of choosing the corporate form argue strongly
against making the subchapter S election. That election would eliminate the
benefit of the low-end corporate tax bracket and put our consultants in the po-
sition of paying individual income tax on the capital purchases made. The elec-
tion would also eliminate the opportunity to exclude the value of employee
benefits from their personal income tax. The same problems argue against the
choice of an LLC for this business.
The other possibility would be the general partnership. In essence, by
choosing the partnership the consultants would be trading away limited liabil-
ity for less complexity. The partnership would not be a separate taxable entity
and would not be required to file annual reports and pay annual fees. From a
tax point of view, the partnership presents the same disadvantages as the sub-
chapter S corporation and LLC.
In summary, it appears that our consultants will be choosing between the
subchapter C corporation and the partnership. The corporation adds complex-
ity but grants limited liability. And it certainly is not necessary for a business to
be large in order to be incorporated. One might question, however, how much
liability exposure a consulting firm is likely to face. In addition, although the
corporation affords them the tax benefits associated with employee benefits
and capital expenditures, it is not likely that our consultants will be able to af-
ford much in the way of employee benefits and capital expenditures in the
short term. Further, these consultants will not likely have personal incomes
placing them in tax brackets considerably higher than the corporation’s. A
strong case can be made for either the C corporation or the partnership in this
situation. One can always incorporate the partnership in the future if the busi-
ness grows to the point that some of the tax benefits become important.
It may also be interesting to speculate on the choice that would be made if
our three consultants were lawyers or doctors. Then the choice would be
between the partnership and the professional corporation. The comparisons
would be the same except that, as a personal service corporation, the professional
corporation does not have the benefit of the low-end corporate tax brackets.
Sof tware Entrepreneur
Phil can easily eliminate the partnership and the limited partnership. Phil is
clearly the sole owner of his enterprise and will not brook any other controlling
persons. In addition, his plan to finance the enterprise with earnings from his