Case Study #4
Jean S. Hamby
Betty Wilson has decided to open a coffee shop and is considering various options including franchising, sole proprietorship, joint venture, corporation and partnership. In addition to determining the best legal entity to form, Betty has to decide if she will employ or partner with various friends and family members. Finally, she plans to name the coffee shop The Gathering Place and must determine if the name is available and a good choice. This paper will evaluate the pros and cons of various business options, address the dilemma of whom to hire and determine if The Gathering Place is a viable option for the name of the coffee shop. Legal Entity Analysis
When forming a business, the owner or owners have many legal entities to consider. Before selecting one type of business formation over another, the owners should consider the advantages and disadvantages of each legal entity to determine the most viable option. To assist Betty, in making her decision; sole proprietorship, joint venture, partnership and franchising options will be evaluated. Sole Proprietorship
A sole proprietorship can best be described as a business entity with only one owner and that owner has complete control of management decisions. Typically, a sole proprietorship can be formed with very little expense or time investment. Essentially to form a sole proprietorship the owner is in business once the required licenses are obtained. While timeliness and cost effectiveness are advantages of this type of business formation, a significant disadvantage is that the owner assumes unlimited personal liability for any liabilities incurred by the business (Armstrong & Permenter, 2011). Another disadvantage is that because a proprietorship is not a separate entity the owner is responsible for all tax payments associated with the organization’s profits (Kubasek, et al., 2012). Partnership
A partnership is considered “a voluntary association of two or more persons formed to carry on a business as co-owners for profit” (Kubasek, et. al, 2012, p. 437). Similar to proprietorships, the partners assume liability for the company’s tax liability. A general partnership is similar to a sole proprietorship in that the business partners assume full personal liability for the liabilities of the business. In a limited partnership however, only one partner is required to be a general partner. Other partners can reduce their risk by becoming limited partners. A limited partners’ liability extends only to the extent of the partner’s financial investment in the business. In addition, limited partners traditionally earn a dividend or return on their investment. Corporation
Although the types of corporations are numerous, at a macro level corporations can be classified as publicly or closely held. A closely held corporation is one that is privately owned and stock is not traded on any of the exchanges (Kubasek, et. al, 2012). Privately owned corporations have one or more owners, who traditionally also actively participate in management decisions and day to day operations. On the contrary, the ownership of publicly held corporations fluctuates with each transaction that occurs on the security exchange where the organization is traded. Owners, also commonly referred to as shareholders, do not actively participate in the management decisions of the company. For the purposes of advising Betty, Subchapter S corporations and Limited Liability Corporations will be considered (both will be assumed to be closely held).
Subchapter S Corporations. A Subchapter S company (“S Corp”), is an incorporated organization that operates like a corporation. A key advantage to a S Corp is that the business is not subject to corporate level taxation (Owen, 2008). Instead for income tax purposes, the business is treated similar to a...