BUS 206 Final Project

Case Study Three: Jeb and Josh are lifelong friends. Jeb is a wealthy wind-power tycoon, and Josh is an active outdoor enthusiast. They have decided to open a sporting goods store, Arcadia Sports, using Jeb’s considerable financial resources and Josh’s extensive knowledge of all things outdoors. In addition to selling sporting goods, the store will provide whitewater rafting, rock-climbing, and camping excursions. Jeb will not participate in the day-to-day operations of the store or in the excursions. Both Jeb and Josh have agreed to split the profits down the middle. On the first whitewater rafting excursion, a customer named Jane falls off the raft and suffers a severe concussion and permanent damage to her spine. Meanwhile, Jeb’s wind farms are shut down by government regulators, and he goes bankrupt, leaving extensive personal creditors looking to collect.

Hi Class-

            There are many types of business entities, but there are a few main ones.  These are sole proprietorship, partnership, corporation, and limited liability companies.

Sole Proprietorship is where once person controls the management and profits (Kubasek, 2015). 

Advantages

· Creation of organization is easy

· Sole Proprietor has complete control of management (hiring, expanding business, etc.)

· Sole Proprietor keeps all profits from the business

· Sole Proprietor can terminate the business at their own will

Disadvantages

· Sole Proprietor is responsible for any losses or obligations associated with the business

· Accrue to much debt and not overcome

· Funding is quite a struggle due to large startup costs

Partnership is where the partners equally divide the profits and management responsibilities as well as share unlimited liability for the business’s debt (Kubasek, 2015).  Also, with a partnership, the partners are not usually required to create an agreement to establish the partnership (Kubasek, 2015). 

Advantages

· Creation of organization is easy

· More resources with two or more people to make decisions and support the business

· Income from business is taxed as individual income for each partner

Disadvantages

· Partners are personally liable for the business’s debts

· The division of authority in decision making

Corporation are a legal entity which is formed by selling shares of stock to investor, or otherwise known as shareholders (Kubasek, 2015).

Advantages

· Shareholders have limited liability

· Profits are taxed as income to the shareholders (not the partners)

· Easy to raise capital by issuing stock

· Protected from being personally liable for the business debts

· Shares can be passed onto family members making a corporation a life business

Disadvantages

· Corporate income is taxed twice

· Formalities are mandatory in establishing and keeping corporate form

· Separate legal entity that can be sued

· Corporations can only operate in the state it was created, unless permission is given by other states

· Cost to establish a corporation already being high, huge hurdle in expanding the business

Limited Liability Company (LLC) is an unincorporated form of business organization.  Most people see this type of business entity as combining the advantages of partnership (management flexibility) with the advantages of corporations (limited liability) (Kubasek, 2015). 

Advantages

· IRS treats it like a partnership or sole proprietorship

· LLC report their share of profits and losses on their personal tax returns, avoiding double taxation

· Members do not have to be citizens or permanent residents of the US

Disadvantages

· Qualification process seems to be a downfall

· If LLC wants to do business in more states, they must register with each individual state

Jeb and Josh have been friends for a very long time.  They both decided to open a sporting goods store, Arcadia Sports.  They will be utilizing Josh’s understanding of sporting goods and Jeb’s wealthiest.  The store will also offer whitewater rafting, camping excursions, and rock climbing.  As Jeb will not engage in the operations or any store excursions, they have both agreed to split profits down the middle. 

            Jane, a customer, on the first white water rafting trip fell off the raft and has permanent damage to her spine.  She also suffered a severe concussion.  Meanwhile Jeb’s source of income, wind farms, were shut down by government regulators, and Jeb goes bankrupt.  This leaves personal creditors looking to collect.  Since Jeb has gone bankrupt the personal creditors are looking to seize assets of Arcadia Sports.   If he were sole proprietor, it would be very easy for the creditors to seize his assets.  Being a general partner still holds you personally liable for losses and debts which means when Jeb went bankrupt the creditors can seize his assets.  If Jeb had created an LLC or a corporation, he would have had a much more protection of his personal assets from the personal creditors. 

 

References:

 Kubasek, N. (2015). Dynamic business law. Boston: McGraw Hill Learning Solutions.