The three Crosby children intend to form a business. The business will borrow $900,000 from a local bank. Which of the following statements is true?
A) Regardless of whether the business is a partnership or an S corporation, the owners will include the bank debt in the tax basis of their ownership interests.
B) From a liability standpoint, the owners should be indifferent as to whether they are a general partnership or an S corporation.
C) If the business is an S corporation, the owners can allocate income and losses in any reasonable manner.
D) If the business is a partnership the owners can allocate income and losses in any reasonable manner.

Question

Quizplus · Accepted Answer

If the business is a partnership, the owners can allocate income and losses in any reasonable manner. This means that the Crosby children can divide the profits and losses among themselves in whatever way they see fit, based on their contributions to the business or any other factors they choose to consider. However, if the business is an S corporation, the owners must allocate income and losses based on their ownership percentages, which may not be ideal for the Crosby children depending on their individual circumstances. Option A is incorrect because only in a partnership can the owners allocate income and losses in any way they choose. Option B is incorrect because the liability implications are very different for a general partnership and an S corporation. Option C is incorrect because in an S corporation, the owners must allocate income and losses based on their ownership percentages.

The Three Crosby Children Intend to Form a Business