Question

Case Study 2

Case scenario: Which Form Is Best?
Watoma Kinsey and her daughter Katrina are about to launch a business that specializes in children’s parties. Their target audience is upscale families who want to throw unique, memorable parties to celebrate special occasions for their children between the ages of 5 and 15. The Kinseys have leased a large building and have renovated it to include many features designed to appeal to kids, include many features designed to appeal to kids, including special gym equipment, a skating rink, an obstacle course, a mockup of a pirate ship, a ball crawl, and even a moveable haunted house. They can offer simple birthday parties (cake and ice cream included) or special theme parties as elaborate as the customer wants. Their company will provide magicians, clowns, comedians, jugglers, tumblers and a variety of other entertainers.

Watoma and Katrina each have invested $45,000 to get the business ready to launch. Based on the quality of their business plan and their preparation, the Kinseys have negotiated a $40,000 bank loan. Because they both have families and own their own homes, the Kinseys want to minimise their exposure to potential legal and financial problems. A significant portion of their start-up costs went to purchase a liability insurance policy to cover the Kinsey in case a child is injured at a party. If their business plan is accurate, the Kinseys will earn a small profit in their first year (about $1,500), and a more attractive profit of $16,000 in their second year of operation. Within five years, they expect their company to generate as much as 50,000 in profits. The Kinseys have agreed to split the profits and the workload equally.

If the business is as successful as they think it will be, the Kinseys eventually want to franchise their company. That, however, is part of their long range plan. For now, they want to perfect their business system and prove that it can be profitable before they try to duplicate it in the form of franchises.
As they move closer to the launch date for their business, the Kinseys are reviewing the different forms of ownership. They know that their decision has long term implications for themselves and for their business, but they aren’t sure which form of ownership is best for them.

Answer all questions.
1. Which form(s) of ownership would you recommend to the Kinseys? Explain.

2. Which form(s) of ownership would you recommend the Kinsyes avoid? Explain.

3. Examine the factors that the Kinsyes should consider as they evaluate the various forms of ownership

Please write all your answers in essay format. Do not answer in point-form unless the questions mention “List” or “State”. It is not necessary to precede each answer with an introduction and end with a summary. Proceed directly with the answer.

PLEASE HELP ME OUT GUYS,NEED ANSWER IN ESSAY.

Answer 1

Ans 1) Out of the four main Business forms it is recommended that Watoma & Katrina adopt the Limited Liability Corporation from of buisness structure for the launch of their business. Limited Liability Company is a hybrid between a Corporation, General Partnership and Sole Partnership. It allows members to be individuals, corporations, other LLs and even foreign entities. In many of the states they permit LLC with only one owner, called "single member LLC".

The advantages of this form mainly are that LLC members are protected from personal liability for business debts and claims, legally if the business faces a lawsuit, and owes money, then, only the assets of the business itself are at risk. Personal assets of the members unless its a case of fraud or illegality and LLC owners have used personal checking accounts for business purposes. It is also imperative that member of the business use the LLC business name rather than using owner's individual names when working with customers.

In a broader view, LLC members are protected even for taxation purposes.Although they need to file the returns showoing the company's  profit and loss for informational purpose, they are allowed to pay the taxes on their individual income tax returns account. This is due to the fact that all profit and losses are split among the members and their individual income is considered for the calculation of the tax.

An LLC form of business allows unlimited number of members for one organisation.

Let us now talk about the disadvantages of this form of business. For the formation of an LLC, there is a filing fee to be paid, which is not the case for a sole proprietor, or the general partnership. Articles of organisation and operating agreements are mandatory to form an LLC. A standard operating agreement would include the Ownership interest of each member, Member rights and responsibilities, Member voting power, Profit & Loss Allocatio, Management Structure & Buy Sell Provision.

LLC's are often submited to additional Taxes at different levels.

Lastly Each member's share of profits represents taxable income even if the profits are not distributed.

In view of the above, this form of business seems to be most suited for Watoma and Katrina, to safeguard their personal assets at the same time to be less vulnerable to the legalities of the business which are unforseen.

Ans 2) I would recommend Watoma & Katrina to stay away from forming a Sole Proprietorship, General Partnership and Corporation.

Sole Proprietorship is out of question as members are more than one.

Generl Partnership although very cheap and easy for set up, has mandatory conditions of creating a partnership agreement by formalizing rules for profit and loss sharing, ownership percentages, dissolution terms and management rights over the business by its members, Taxes are reported by filing anuual information return but each partner pays taxes on their share of the profit or loss.

However, the biggest disadvantage is the issue of LIability whereby owners typically have unlimited personal liability and each partner is jointly liable for the partenership obligations.

Ans. 3) The factors to be considered by them are mainly Stability of the business, low setup costs, very limited liabilties especially in the first two years whereby legal issues may rise up, some very good contracts, good bookeeping and taxation filing in time, responsibilites of each member, percentage of distributions of Profits & Loss, Banking and rights to banking, and recording of Capital Contributions including the Loan that they are going to avail, the repayment and its responsilibity.

Additionally, for future plans they must consider retaining income and very intelligently, monitoring closely the business plan and any differences betwen the actual and budgeted figures, the reasons and the impact on the business. Immediate actions to correct the same is required by both members thus stabilizing the business in due time instead of carrying forward any deficits or backlog.

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