Three (3) personal trainers at an upscale health spa/resort in
Sedona, Arizona, want to start a health club that specializes in
health plans for people in the 50+ age range. The trainers Donna
Rinaldi, Rich Evans, and Tammy Booth are convinced that they can
profitably operate their own club. They believe that the growing
population in this age range, combined with strong consumer
interest in the health benefits of physical activity, would support
the new venture. In addition to many other decisions, they need to
determine the type of business organization that they want to form:
incorporate as a corporation or form a partnership. Rich believes
there are more advantages to the corporate form than a partnership,
but he has not convinced Donna and Tammy of this. The three (3)
have come to you, a small-business consulting specialist, seeking
information and advice regarding the appropriate choice of
formation for their business. They are considering both the
partnership and corporation formation options.
Assume the trainers determine that forming a corporation is
the best option. Next, Donna, Rich, and Tammy need to decide on
strategies geared toward obtaining financing for renovation and
equipment. They have a grasp of the difference between equity
securities and debt securities, but do not understand the tax, net
income, and earnings per share consequences of equity versus debt
financing on the future of their business. They have asked you, the
CPA, for your opinion.
Provide a summary to the partners, outlining the advantages
and disadvantages of forming the business as a partnership and the
advantages and disadvantages of forming as a corporation. Recommend
which option they should pursue. Justify your response.
Explain the major differences between equity and debt
financing, and discuss the primary ways in which each would affect
the future of the partners' business.