Tom is married with two children both in college

Tom is married with two children both in college. His wife, Mary is employed as a manager is a large manufacturing company making moderate income in the range of $175,000 per year. Mary’s job provides medical benefits to the family. Tom has been self employed without a significant amount of income from his endeavors. His primary interest now is building a self storage facility on a piece of land he acquired several years ago.

Tom is in the process of building a storage facility for rental to the public. He is borrowing 95% percent of the construction costs of $3,000,000 from his father. The facility is expected to run at a loss for several years as it becomes occupied and due to the large amount of interest expense paid on the loan because of the high debt. A rough estimate is that the losses could be as high as $150,000 per year in the early stages.

It is contemplated that Tom and his wife will own an interest in the venture and that the children will each own an interest in the venture with the proposed ownership being 50% owned by Tom and his wife and 25% owned by each of the children.

Tom has come to you requesting your advice regarding the kind of entity that should be used for such an endeavor. His wife who has done a significant amount of research on the internet and spoken with legal counsel believes that the best type of entity to use is an S-corporation. Tom has previously discussed the matter with members of the firm you work with and they feel that an LLC would be the better choice. Tom’s wife is very insistent that an S-Corporation would be the appropriate form of entity to use. Please draft a memo to Tom and his wife with your recommendation as to the best type of entity to run the rental activity through. Include in your memo explanations as to why you are recommending the particular type of entity along with reasons you would not recommend
the other type. Include in your discussion the potential tax effects of the initial
capitalization along with the pros and cons of each type of entity.