Phil Hooser has big plans. He wants to open a motorcycle shop on the outskirts o
ID: 427469 • Letter: P
Question
Phil Hooser has big plans. He wants to open a motorcycle shop on the outskirts of town. He plans to purchase a ten-acre plot of land and eventually he wants to also have a motorcycle race track on land. His brother will help him purchase the land and he has about $100,000 to invest in the project. He has no children, but two ex-wives.
Is it sole proprietorship, partnerships, LLC or corporation. You must support you answer by evaluating the needs of the particular business and the characteristics of the entity chosen. Evaluate for tax concerns, potential liability, governance, continuity, raising funds, and maximizing opportunities. Do not use platitudes or personal preferences as a rationale, rely solely on facts.
Explanation / Answer
Depending on the given case, Phil could either have a sole proprietorship or a limited liability corporation.
The reason for the assumption is:-
1. If he has big plans he would require a skilled management process as well as oversight of the entire operation and therefore, carry out the functions of all the important positions at once becomes a liability on the long run.
2. If he plans to go into business with his brother, who is helping him purchase a land, the brother would only be a limited liability -[partner and not a full partner. Because he is only helping Phil and not actually performing a task requiring managerial as well as decisions made by the chairperson (Phil’s role).
3. He has no children, therefore, his wives, if they decide to go into business with him, could either be a limited partner or a full partner. But seeing that Phil is the one investing the money, We cannot call it a full partnership, rather an LLC.
All the above factors point to the direction of an LLC the most, sole proprietorship[ the second and a partnership as the last option.
An LLC would allow the company structure to be the most functional. The limited liability partners would not have a say in the managerial level functions of the company or its general direction which would mean that Phil will always be in control of his company. Secondly, the other LL partners would provide him with the division of tasks and delegation as appropriately as possible. And thirdly, this structure makes sense when we consider the tax structure which would be based on the structure Phil wants to follow since it can allow any type of tax structure of both partnership, sole proprietorship etc. this also means that the individuals would either be taxed separately based on their income, or can apply for an S corporation structure. The sole liability in this structure will be on Phil and the LL members would have no liability in the legal matters of the company.
Raising further funds for the business would be a harder task with this structure but, easier than a sole proprietorship. Also, the management would become much easier because, even though Phil has the right to managerial level decisions, all the other partners can help enforce them in the business structure.
This structure has the most maximization potential for the owner as they have all the decision making power in the company, this includes tax determination, How profits are distributed, which structure is followed. For an entrepreneur, it allows them to manage their new business much easier.