Carrie is presently operating as a proprietorship grossing $200,000 a year and netting $100,000 a year after expenses. She has designed her line of clothing and other wearable gear, plus DVDs and other products suitable for meditation, practicing tai chi, and similar activities. She has obtained copyright protection for her creative work to the extent allowed by law. Carrie does not have any inventory at the present time but plans to acquire inventory and begin marketing and selling her products shortly after forming the new entity. Carrie does not plan to manufacture her products. She will contract that activity out to manufacturing companies recommended by her celebrity friends experienced in the marketing of their own personal lines. In addition, one of Carries closest friends business managers has agreed to offer his services as a consultant to help Dave adapt his skill set to marketing Carries line of products.

Dave has mapped out a business plan calling for modest sales and no or little profit in the first year, but once things catch on, he projects considerable growth and profit potential as follows:

Year Sales Net Income

1 $1 million None

2 $5 million $500,000

3 $15 million $2 million

4 $30 million $5 million

5 $50 million $10 million

Carrie, Dave, Naomi, and Andy all plan to become owners of the business in the following ownership percentages:

Carrie, 50% Dave, 20% Naomi, 5% Andy, 25%

Carrie will be contributing her designs, good will, and contacts willing to endorse her products for free. Dave and Naomi will be contributing their hard work and expertise. Andy will be contributing $500,000 to cover the cost of inventory and initial marketing and other operating expenses. Because the products will be marketed to customers in connection with a physical activity, all four future owners are concerned about potential product and other liability and want to make sure the choice of business entity protects them from personal liability should an adverse event result from product use. They plan to name the business Tai-Ga. The Tai-Ga organizers (hereafter, the Organizers) want your professional advice regarding whether they should form a partnership, an S corporation, a C corporation, or some other type of business entity.

The business entity chosen is an LLC.

Question 1: What is the value assigned to the organizers' equity accounts vs debt payable to the organizer?

Question 2: What is each organizers cost basis in Tai-Ga?

Question 3: Will an of the organizers have a capital gain or loss to file at the end of year 1 becasue of their intial contribution stated above?