George, Kim, Martha and Tom have decided to open a Polynesian restaurant that specializes in Oriental food and tropical drinks.

George has no personal savings to invest; however, he has a bartender's license as well as seven years of experience as an assistant manager at a large restaurant. Plans to work full-time co-managing the restaurant with Martha.

Kim recently inherited $500,000 and is interested in investing up to $250,000 of it in a business opportunity. However, as a full-time medical student, Kim has neither the time nor the desire to operate the business.

Martha has personal savings of almost $80,000 and is willing to invest up to $60,000 of it in the restaurant. She also wants to set the remainder aside for her son's future college expenses. She plans on working full-time with George as co-manager of the restaurant.

Tom is the owner of The Home-Cooked Meal restaurant which he operated for 10 years but recently closed. The Home-Cooked Meal was operated as a C corporation. It has furniture, fixtures and equipment (FF&E) with a FMV of $300,000 and adjusted basis of $40,000. The new restaurant can only use $250,000 (FMV) of the assets. Tom also owns the land and building where The Home-Cooked Meal operated and the parties believe that it is a great location for the new restaurant. The Building has a FMV of 275,000 and adjusted basis of $165,000; the Land has a FMV of $50,000 and adjusted basis of $50,000, the property is subject to a mortgage of $200,000. The parties have discussed two alternative ownership/contribution structures:

Alternative Structure 1:

The proposed ownership interests and contribution are as follows:

Ownership Interest Contribution

George 15% Personal Services

Kim 25% $150,000 Cash

Martha 10% $ 60,000 Cash

Tom 50% $250,000 of the FF&E

Alternative Structure 2:

The proposed ownership interests and contribution are as follows:

Ownership Interest Contribution

George 15% Personal Services

Kim 25% $250,000 Cash

Martha 10% $ 60,000 Cash and Personal Services

Tom 50% Tom will contribute $250,000 of the FF&E plus Land & Building FMV $325,000

Tom will receive $75,000 cash Payment from the Business.

PROBLEM:

For alternative structures 1 and 2, evaluate which of (a) a General Partnership, (b) LLC or (c) Corporation would be the appropriate form of doing business for each person above with regard to the following Issues of (i.) ease of formation, (ii.) management, (iii.) liability for the business's liabilities, (iv.) the transferability of the ownership interest, and (v.) the basic federal income tax advantages or disadvantages for each of the three forms of doing business.