Question

In Good Company

The waitress set down a plate of nachos and two pints of beer in front of Stan and his old college buddy, Ron Ebbers. Ever since they’d run into each other at Stan’s Subway restaurant, the two had rekindled their friendship over beer and nachos at a local restaurant.

“Sales still on the up and up?” Ron asked Stan. “Yep. It just doesn’t seem to matter how weak the economy is,” said Stan. “People will always want a sandwich that’s healthy, great tasting, and a good value.”

And now,” Stan lifted a glass, “ salu—a toast—because as of today I’m a corporation!” “Cheers, Stan the Man!” exclaimed Ron and clinked Stan’s beer mug. “But doesn’t incorporating cost you more money in legal fees and taxes?” “Well, that may be true, but if I don’t incorporate and anything goes wrong or some wacko sues me, it could cost me my shirt! Now I have limited liability, but I still pay wages to my employees, send in my royalty fees to Subway, and muchos profits still go to me.”

“Maybe I should buy stock in Subway,” Ron interrupted. “I’ve been dabbling in the market lately and Subway seems like a good bet!” “Unfortunately, you can’t buy stock in Subway,” said Stan. “Doctor’s Associates, the corporation that owns the Subway brand, is privately owned by the founders Fred DeLuca and Dr. Peter Buck.

“Doctor’s Associates?” Stan exclaimed. “That’s strange. I know the food has helped people lose weight and eat healthy, but is Subway run by a health-care outfit?”

“No, it’s actually kind of interesting. In 1965 Fred DeLuca was just a teenager who wanted to go to college and become a doctor, but he didn’t have enough money.

Then his family friend, Peter Buck, loaned him the money to start a submarine sandwich joint. DeLuca, of course, never did become a doctor, but Peter Buck holds a Ph.D. in nuclear physics, so they called themselves Doctor’s Associates—they’re the ‘doctors’ and we franchisees are the ‘associates.’”

“I guess we all have dreams that we don’t carry out,” Ron mused. “Hey, don’t look so triste, amigo. I know you’re stuck in a dead-end job now, but maybe now is the time to think about new opportunities.”

“Whaddaya mean?” Ron asked.

“There’s a great space on Alameda Avenue on the other side of Los Palmos—near that fancy new apartment complex. I’ve been thinking of eventually opening up another store, but I don’t want to go it alone. However, I might consider going into a partnership with you to own Subway number 2.”

“Well, given the liability risks you just mentioned—which I assume apply to partnerships as well as sole proprietorships, what about a corporation?” said Ron eagerly. “You could be the majority shareholder and I could have a smaller interest in the restaurant until I learn the ropes and eventually buy you out.”

“Whoa there. Let’s not talk about buying anyone out just yet,” laughed Stan. “Before you do anything—if you’re serious about being a Subway owner—you’ll need to go to Subway University.”

Ron raised his glass, “Salute.”

“No man, salud,” corrected Stan. “A toast. To opportunidades del futuro y amistad. To future opportunities and friendship.”

Tasks *******

1. What are all the advantages and disadvantages of forming a corporation?

2. What do you think is the best way for Stan and Ron to own a Subway restaurant jointly? Partnership or corporation? Why?

Answer 1

Answer to 1:-

Advantages of forming a corporation:

• Separate liabilities: A corporation is an entirely separate legal entity from its owners and shareholders. That means that in situations such as the company being sued or the corporation owing debts, the owners and shareholders cannot be sued or held personally liable for the debts.
• Investors: If you’re trying to raise capital by selling shares in the company, you’ll need to be incorporated. You’ll also need to form a corporation if you ever plan to go public.
• Taxes: Depending on the corporate structure under which you choose to do business, you can elect to have pass-through taxation to your personal taxes, or you can avoid double taxation.
• Never-ending business: A corporation remains a corporation even if the owner leaves, dies, or sells off the company. It’s called perpetual existence.
• Credibility: A business with an Inc. or LLC extension after its name often sounds more credible to outsiders. You’ll most likely attract more partners, customers, and attention from the community if you choose some form of incorporation. Being incorporated can also help protect your business name in the state in which you do business.

Disadvantages of forming a corporation:

• Money: It’s not cheap to incorporate, so if you’re just starting out and cash flow is an issue, know that you’ll be paying for such costs as state filing fees, franchise tax, attorney fees (if you need an attorney), and other government fees.
• More paperwork: As a corporation, you’re required to file Articles of Incorporation, bylaws, corporate minutes, certificates of good standing, and other paperwork on a regular basis.
• More taxes to file: You’ll need to file a separate tax form and can’t claim any personal tax credits on it. Plus, business losses can only be applied to the business — they can’t help you on your personal taxes.

Answer to 2:-

Best way for Stan and Ron to own a Subway restaurant jointly:-

First we have a look on partnership:-

A partnership is a non-incorporated business that is created between two or more people. In a partnership, your financial resources are combined with those of your business partner(s), and put into the business. You and your partner(s) would then share in the profits of the business according to any legal agreement you have drawn up.

• There is no legal difference between you and your business
• Unlimited liability (if you have business debts, personal assets can be used to pay off the debt)
• Possible development of conflict between you and your partner
• You are held financially responsible for business decisions made by your partner

Hence from the above discussion it is clear that and in my opinion too,

The best way for Stan and Ron to own a Subway restaurant jointly is corporation.