Exam 5: How to Form a Business

The owners of Idle Time Gaming Company would like to become an S corporation. Unfortunately, their lawyer advised them that they do not meet some of the requirements necessary to qualify as an S corporation. An alternative form of business that would give them similar advantages is a limited liability company.

A domestic corporation does business in the state in which it's chartered.

Starting a new business as a sole proprietorship:

When a group of investors take a firm private, they purchase all the company's outstanding stock.

The __________ is usually the easiest form of business to start and end.

A(n) ___________________ is a state-chartered legal entity with authority to act and to have liability separate from its owners.

One advantage of an S Corporation is that the profits are distributed to the owners and taxed as each owner's personal income, thus avoiding the problem of double taxation.

Once a business is established, it's almost impossible to change from one form of business ownership to another.

Kristen and her brothers and sisters set up a design firm called Houses by Design LLP. Although key business functions are centralized, each sibling is a licensed architect that designs, builds, and installs residential and commercial buildings for his/her own clients. Unfortunately, a design created and installed for one of their clients resulted in water damage to the basement of the client's new home. The limited liability partnership:

One advantage of corporations is that the initial cost of organization is usually lower than for other forms of business ownership.

One advantage of a partnership is that there is a simple process for partners to terminate their business.

Chipper's Golf Resort has the opportunity to buy 1,000 acres of property adjacent to its 18-hole golf course. After talking with her banker, the owner is encouraged to begin the paperwork to change from a limited liability company form of business ownership to a corporation. You applaud this strategy because she will eliminate the problem of double taxation.

A general partner has unlimited liability for the debts of the partnership only if he or she personally approved the decisions that resulted in those debts.

The owners of California Canines, a firm that designs and manufactures coats, sweaters, jackets, and rainwear for dogs, want to organize as an LLC. Two members are college students and two others are thirty-something couples with young children. This is good strategy because each member can choose to commit to limited or unlimited liability.

Rocky Rhodes is convinced that he has a great idea for a new business. Unfortunately, the type of business he wants to start would require a fairly high initial investment and Rocky has a poor credit rating and very little personal wealth. Rocky would be unlikely to find success if he organized his business as a sole proprietorship.

Which of the following is an advantage of the corporate form of business when compared to sole proprietorships and partnerships?

One of the drawbacks of a limited liability company is that most states do not yet recognize this form of ownership.

With respect to taxes, the sole proprietorship:

If a group of stockholders or management obtain all the stock of a previously publicly traded firm for themselves, this is referred to as:

Mini-Case For as long as she could remember, Jenna Raiter's passion was cars. As a teenager, she spent hours with her dad tinkering with the family car, learning to change the oil and making minor repairs. She got a job at a local garage while still in high school. A few years after graduating from high school and completing the auto mechanics degree at a local community college, Jenna decided she wanted to be her own boss. She quit her job, borrowed some money from her dad, and began her own repair shop, the AutoMotion Garage. Jenna's hard work gradually attracted a loyal clientele of satisfied customers. Her success has her thinking about opening garages in two other locations, but she lacks the financial resources needed for expansion. Furthermore, the success of her business is forcing Jenna to spend more time managing the business and less time doing the actual technical work she still enjoys. She wants to find business partners who can help her with management and provide additional financial resources. She has approached a couple of friends she met in high school: Al Ternator and Lew Banfilter, to see if they would like to join the business. -Although Lew Banfilter, now a young attorney, is impressed with AutoMotion and believes it could be a place to invest money, he informed Jenna that his professional position at a law firm prevents him from taking an active role in the business. He is also concerned about accepting more risk since he has a young family. He mentioned a preference for unlimited liability. If Lew joined Jenna and Al, the three might consider forming a(n):