1 .If a manager signs a contract with a strict provision prohibiting the manager from competing against this company if the manager leaves the company, what type of agency cost is this provision?
2 .The U.S. tax code allows the creation of a taxable entity known as an S corporation. According to the Internal Revenue Service (www.irs.gov/businesses/small/article/0,,id=98263,00.html):
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income. Corporations that do not elect to be treated as S corporations are called C corporations.
a. How does income get taxed twice in the case of a C corporation?
b. The shareholders of an S corporation are still entitled to limited liability in the case of bankruptcy of the corporation. What are the advantages of being an S corporation if an entity can qualify to do so?