1) James T. Kirk has decided to make and sell phasers (stun only, of course!). He printed up some fliers about his phasers and handed them out to friends and acquaintances at Comic Con. As a result, he received 4 orders. He built the phasers (his cost was $50 dollars each) and sold them for $75 each. If this is all of the activity to date for James' business, what is the classification of his business?

A) Limited Liability Company (LLC)

B) Corporation

C) Sole Proprietorship

D) Partnership

2) James T. Kirk (from the previous example) has started to receive multiple orders for his stun-only phasers. He will need to hire employees to help with manufacturing, procure a office site, and expand his marketing efforts to help increase sales to cover the cost of expansion. He anticipates he will need a total of three additional employees. James is going to call his business James T. Kirk Enterprises and wants to obtain liability protection to help protect the business and his personal assets. The easiest way for James T. Kirk to achieve this is to form a(n):

A) Corporation

B) Partnership

C) Limited Liability Company (LLC)

D) Sole Proprietorship

3) What are the main advantages of a C Corporation? (Check all that apply)

A) Limited liability

B) Double taxation of dividends

C) Ability to raise large amounts of capital

D) Continuous Life

E) Regulatory costs

F) Owner is separate from management

4) Sonny and Cher have strong connections in the music industry. They decide that they want to start an agency for up-and-coming musical talent. While they are recently divorced, they think that they can still work well together because of their love for music and their professionalism. They already have three potential clients who are looking to go elsewhere if Sonny and Cher can't get something set up within the week. Securing these three clients is vital to the continued success of the business. They have limited funds but are confident that they can get started with the business as soon as possible and be successful. They come to you for advice on how best to organize their business and the next steps to take. Which of the following choices gives the best advice for Sonny and Cher's situation?

A) There are different types of partnerships, but a general partnership seems to be the best avenue for Sonny and Cher. You advise Sonny and Cher that they should draft a partnership agreement to help when disagreements arise (which they will). Other than the partnership agreement, you advise them that there is, technically, nothing else they need to do other than to keep track of their business expenses separately from their personal expenses.

B) Because partnerships are merely businesses owned by more than one owner, Sony and Cher can start their business today without filing any state paperwork. You advise them that there is, technically, nothing they need to do other than to keep track of their business expenses separately from their personal expenses.

C) While you know that Sonny and Cher want to start the business quickly, you do not think it is wise. You think they should become a C Corporation so the business can have infinite life. While it can be costly to go through the process of incorporation, and the time delay may cause Sonny and Cher to lose their three potential clients, you advise them that this is the best choice.

D) There are different types of partnerships, but a general partnership seems to be the best avenue for Sonny and Cher. You advise Sonny and Cher that they should draft a partnership agreement to help when disagreements arise (which they will). Because of the recent divorce, you think it also best to organize as an LLC that is taxed as a partnership. This way, the business with have the same legal and financial protection of a corporation, but is simpler to operate and can be started by simply filing their LLC name with the state. This option will allow them to begin their business within the week. You also advise them that they need to keep track of their business expenses separately from their personal expenses.

5) Randall Boggs, president and CEO of Monsters Inc., applied for a $175,000 loan from Monsters First Bank. The bank requested financial statements from Monsters Inc. as a basis for granting the loan. Randall tells his accountant to give the bank the balance sheet. Randall doesn't want to give the other statements because Monsters Inc. had a net loss during the last year. What concerns (if any) does this action by Randall have on the shareholders of Monsters Inc? What information do you think a bank would need before deciding to extend a loan? What action (if any) do you think the board should take regarding Randall's decision?