Dr. Nick is the sole owner of a Limited Liability Company (LLC) that sells his services to hospitals and clinics under the name, Doctor Nick, LLC. He employs an assistant full-time to manage his business and find contracts for his services with various local hospitals and clinics. He has no interest in working with other doctors in his medical practice.
In 2016, Doctor Nick, LLC, was paid $1 million by hospitals and clinics based upon the medical services he rendered. After deducting various expenses, the LLC's net income was $500,000. Thus, as he was in the 35% individual taxpayer tax bracket, he owed the IRS $175,000 in federal income taxes.
As you should have heard, President Trump is proposing that Congress pass a law making sweeping changes to the US Income Tax Code for the first time since 1986. The following is an article detailing one such proposal that could be beneficial to wealthy professionals like Dr. Nick:
To answer the following question of this exercise, you will need to review this article. Tax Reform Loophole?
1. Explain why Dr. Nick's tax lawyer, Lionel Hutz, advised him to form a limited liability company for his medical practice rather than an ordinary corporation.
2. Why couldn't Dr. Nick have formed a Limited Liability Partnership?
3. Explain how Dr. Nick would benefit from the proposed change referred to in the article.
4. If the proposed tax change described in the article is passed into law by Congress, for tax reasons, why wouldn't it be advisable for Dr. Nick to form a sole proprietorship instead of an LLC?