Question

Debby Kauffman and her two colleagues, Jamie Hiatt and Ella rincon are personal trainers at an upscale health spa/resot in Tampa, Florida. They want to start a health club that specializes in health plants for people in the fifty plus range. The growing pop in this age range and strong consumer interest in the health benefits pf phsyical activity have convinced them they can proitably operate their own club. In addition to many other deicisions, they need to determine what type of business organization they want. Jamie believes there are more advantages to the corporate form than a partnership, but he hasn't yet convince Debby and Ella. They have come to you, a small business consulting specialist, seeking information and advice regarding the choice of starting a parnership versus a corporation

A) Prepare a memo (dated May 26, 2016) that describes the advantages and disadvantages of both partnerships and corporations. Advice Debby, Jamie and Ella regarding which organizaation form you believe would better serve their purposes. Make sure to include reasons supporting your advice.

Part II After deciding to incorporate, each of the three investors receives 20,000 shares of $2 par common stock on june 12, 2016 in exchange for their co- owned building ($ 200,000 fair value) and $100,000 total cash they contributed to the business. THe next diecision that Debby, Jamie, and Ella need to make is how to obtain financing for renovation and equipment. They understand the difference between equity securities and debt securities, but do not understnad the tax, net income, and earnings per share consequences of equity versus debt financing on the future of their business.

B. prepare notes for a discussion with the three entrepreneurs inw hich you will compare the consequeneces of using equity versus debt financing. As part of your notes show the differences in interest and tax expense assuming $1,400,000 is financed with common stock, and then alternatively with debt. Assume that when common stock is used 140,000 shares will be issued. When debt is used, assume the interest rate on debt is 9% the tax rate is 32& and income before interest and taxes is 300,000

Answer 1

Debby, Jamie and Ella should choose corporation form over partnership form of business. Advantages for choosing this form are as follow:

1. Liability in partnership firm is unlimited. In case of insolvency, partners are liable to pay debt from their private properties. But in case of corporations liability of shareholders is limited upto nominal price of share. Private properties are not attached to pay business debts in case of liquidation.

2. In case of expansion of business, partnership firm depends only on partners for generation of finance. But in case of corporations money can be generated from outside source of finance such as loan and debts.

	Common Stock	Debt
Income before interest and tax Less: interest(1400000*9/100) Income before tax Less: tax 32% on income before tax Income after tax Number of shares Earning per share	300000 (---) 300000 (96000) 204000 200000 1.02	300000 (126000) 174000 (55680) 118320 60000 1.972

Number of shares= Exsiting shares 20000*3=60000

New shares =140000

Total 200000

In case of debt only exsisting shares shall be taken.

in case on debt there is tax benefit on interst and earning per share is also higher. So debt should be choosen.