A) You have three clients coming to see you today to figure out what legal form they should use for a new business they are starting. Make a list of questions to ask them.

B)

(1) Doyle is the owner of 18 laundromats, all of which are in the Tucson, Arizona area. She started the business 20 years ago with one laundromat and has grown it steadily over the ensuing years. She has always operated the business as a sole proprietorship, and the business has been quite profitable. Doyle has recently considered adding one or more partners to her business so that she'd have the capital to expand into the Phoenix area. These plans are currently on hold, but Doyle may pursue them again in the future.

Doyle's nephew is a second-year law student at the University of Arizona. He recently told Doyle about his Business Organizations class where he learned, among other things, that from a legal perspective a sole proprietorship is not a good form in which to operate a business (although he can't remember why). Hence, Doyle has come to see you about changing the legal form of her business. Doyle's priorities, in order, are minimizing taxes, minimizing legal and filing fees, and being attractive to potential future partners.

Under which legal form should Doyle operate her business? Which federal income tax status should she go with for the business?

(2) Amin, Basu, and Cano are planning to open a flight training school in Tucson, Arizona, which they will own equally. Amin is the instructor and will largely run the operation. Amin intends to provide all his time, but no initial cash, to the venture. Amin's incentive is to use the flight time he accumulates to qualify for a commercial pilot's license. Basu is the technical engineer whose function will be to provide all the necessary aircraft maintenance. Basu intends to work only part time as she is currently taking classes at the University of Arizona. Both Amin and Basu will receive a salary. Cano will be a passive investor in the venture and does not intend to participate in the management or day-to-day operations unless things do not go well.

Cano is a very wealthy individual and, accordingly, has substantial passive income that she would like to eliminate or reduce with passive losses. Consequently, Cano has agreed to provide all funds necessary to purchase the aircraft and to defray the working capital needs of this venture provided that all losses generated by this venture be specially allocated to her. Additionally, Cano requires that no funds be distributed to Amin or Basu until she has recouped all of the money she has invested in the venture.

Under which legal form should the business operate? Which federal income tax status should it go with?

(3) Xu is a spine surgeon who has developed a prototype vertebrate replacement device. Xu is involved in many projects and does not have the time to further develop the device, although it has shown promise. Yazzie is a recently retired CEO of a major medical device company and is already bored. Thus, she is planning to launch a startup to complete development of and hopefully commercialize Xu's device. Xu will contribute the device and Yazzie will contribute $500,000. Yazzie would like Xu to be involved with the development of the device, but not with the overall direction of the business. Yazzie estimates that development costs (including obtaining FDA approval) will run at least $50 million. Fortunately, Yazzie has many contacts with venture capitalists and angel investors. Xu and Yazzie are both wealthy and have various investments that generate passive income.

Under which legal form should the business operate? Which federal income tax status should it go with?

(4) Cheapskate is starting a website design business that he will run out of his apartment. He will do all the work himself. He has come to you for advice on choice of form for his business. (He is a childhood friend of yours, so you have agreed to provide some initial advice for free.) He is cheap, so he does not want to pay any filing fees or legal fees related to the form. He also wants to minimize taxes.

Under which legal form should Cheapskate operate his business? Which federal income tax status should he go with for the business?

(5) Flores owns five different apartment buildings in the Dinkytown area of Minneapolis, Minnesota. She rents the apartments almost exclusively to University of Minnesota undergraduate students. She does not invest much money in upkeep, because she figures the students will trash the apartments anyway. She is, however, concerned about liability exposure. In particular, she is worried that a catastrophic occurrence at one building (such as a fire) will cost her all of her buildings. The five buildings are currently owned by Flores Apartments, Inc., a Minnesota corporation. Flores is the sole shareholder of the corporation, and it is taxed under Sub-S. How could Flores reorganize her business to decrease liability exposure?

Reference:

Business Organizations; A Transactional Approach by SJOSTROM