Three (3) personal trainers at an upscale health spa / resort in Rancho Mirage, California, want to start a health club that specializes in exercise programs for people in the 50+ age range.

The trainers Donna Rinaldi, Rich Evans, and Tammy Booth are convinced that they can profitably operate their own club. They believe that the growing population in this age range, combined with strong consumer interest in the health benefits of physical activity for older people, would support the new venture. In addition to many other decisions, they need to determine the type of business organization that they want to form: incorporate as a corporation or form a General Partnership or Limited Liability Company.

They intend on hiring several employees who will work the front desk answering phones and setting up personal training appointments. They will also hire other personal trainers as the business hopefully grows. The customer base will generally be elderly and there may be some body contact between the trainer and the client as deemed appropriate to show the client technique, movement, etc.

When it comes to organization, none of the trainers are very well organized and they tend to run things very casual.

They do have some cash to purchase items but it will deplete their savings. They intend on leasing and purchasing gym equipment, they will have to purchase computers, phones, and other equipment and will have to remodel their gym. They will be leasing the space where the gym is located.

Rich believes there are more advantages to the corporate form than a general partnership or LLC, but he has not convinced Donna and Tammy of this. Donna believes a general partnership is the way to go while Tammy would like to setup an LLC.

The three (3) have come to you, a small-business consulting specialist, seeking information and advice regarding the appropriate choice of formation for their business. They are considering the general partnership, LLC, and corporation options.

They generally get along and agree on things but there may be times of disagreement so they do not know if this should factor into what type of entity they should create. Also, Tammy is in her late 60's and believes she may be retiring in the next 5 years.

They heard something about an S Corporation and C Corporation as well as closed corporations. They would like to know what these are about.

As with any exercise activity, there can be injuries. Is there any way they can minimize exposure to lawsuits in any entity they form or doing other things in the gym itself.

Finally, Donna, Rich, and Tammy believe they will qualify to get a small business loan through the government. In terms of weighing this option, they would like you to explain if they should get a loan or bring on investors.

1. Explain the major differences between equity and debt securities, and discuss the primary ways in which each would affect the future of the partners' business with well thought out reasoning. Should this be factored when they are considering getting an SBA loan?