Essay About Majority Of Companies And Smithon Widgets

Cpa with an office in Nearlakes City
C Corporation is an entity or organization created by operation of law with rights of doing business essentially the same as those of an individual. The entity has continuous existence regardless of that of its owners and generally limits liability of owners to the amount invested in the organization. The entity ceases to exist only if dissolved according to proper legal process. It is easily transferred and has an unlimited life. It is a corporation in the United States that for federal income tax purposes is taxed under the chapter 1 of Internal Revenue Code. Majority of companies and many smaller companies are treated as C corporations for Federal income tax purposes. It is a taxpaying entity unto itself, separate and distinct from its shareholders. Therefore, the income from a C Corporation is subject to double taxation on dividends. Its shares are held by shareholders and may be publicly traded. It consists of one or more owners offering limited liability, centralized management, and free transferability of interests. Both Smithon Widgets and Johnson services are C Corporations. Mr. Jones is deciding to purchase Smithon Wigets which has been very profitable. He is also a major shareholder of Johnson Services that has incurred significant losses. Being a tax professional in my opinion the questions should be concluded likewise. The first question (1a) that arises is whether Mr. Jones should purchase the stock of Smith outright, leaving Smithon intact. The smithon manufacturing being a very profitable company will give profit to Mr. Jones if he buys it. But buying it would incur a heavy investment of money in the manufacturing equipment. This implies that smithon will incur losses for 2-3 years. But if we see in the longrun Smithon proves to be a profitable corporation which will fetch a lot of benefits. So Mr. Jones should purchase the stock of smith outright. Mr. Jones should issue shares of stock from Johnson Services to the shareholders of Smithon in an exchange of shares. That way, the current Smithon owners would become new shareholders but not owners of Johnson Services and he would get all the shares of Smithon. Doing so could probably offset Smithons profits with the losses from Johnson Services. Thus it should issue debt in the Johnson Services company to pay for the Smith company. Initially it will raise the debt to equity issues which will imply that a company has been aggressive in financing its growth with debt. This can also result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations, the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company