Abe is an entrepreneur who likes to be actively involved in his business ventures. He is going to invest $500,000 in a business that he projects will produce a tax loss of approximately $100,000 per year in the short run. However, once consumers become aware of the new product being sold by the business and the quality of the service it provides, he is confident the business will generate a profit of at least $125,000 per year. Abe has substantial other income (from both business ventures and investment activities) each year. Advise Abe on the business form he should select for the short run. He will be the sole owner
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To advise Abe on the business form he should select for the short run, we need to consider his goals, liability exposure, taxation, and control preferences.
1. Sole Proprietorship: As the sole owner, Abe could choose to operate as a sole proprietorship. This is the simplest and most common form of business ownership. However, there are potential drawbacks.
Liability: With a sole proprietorship, there is no legal distinction between Abe and the business. This means that he has unlimited personal liability for the debts and obligations of the business. If the business incurs large debts or faces legal actions, Abe's personal assets could be at risk.
Taxation: In a sole proprietorship, business income is taxed as personal income. This means that Abe would report the business's profits and losses on his personal tax return. The projected tax loss of $100,000 per year could potentially offset some of Abe's other income, reducing his overall tax liability for those years.
Control: As a sole proprietor, Abe would have full control over all aspects of the business. He would be solely responsible for making decisions and interacting with customers, suppliers, and employees.
Given the information provided, and assuming Abe wants to actively be involved in his business ventures, a sole proprietorship could be a suitable form for the short run. It offers simplicity and immediate control over the business. However, Abe should carefully consider the potential risks associated with unlimited personal liability, especially if the business carries significant debts or potential legal exposure. It is advisable to consult with a business attorney or financial advisor to fully assess the implications before making a decision.