Posted: August 2nd, 2022

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I attached the discussion question and my classmates post, I need reply on classmates post. one reply for each post. 200 words each. 

Need today

Steve is a 52-year-old mechanical genius. He has just invented a device sure to make a million, a billion! It is an automatic laundry sorter that utilizes nanotechnology to determine color, weight and size and will be every person’s dream gift. This is not Steve’s first invention, and he has become seriously wealthy with prior clever ideas. At this point in his life, he has a big income from prior projects, a huge house with no mortgage, a wife and five kids under the age of 18. Two of the kids are teenagers that seem to have inherited Steve’s interest in technology. The problem with Steve is that he is pathologically shy, and has no clue how to get his product out there in the marketplace. He has decided he no longer wishes to use his prior partners, attorneys or contacts to market this new device.

Steve meets Ben. Ben is only 21 years old, single, rents a one-room apartment where he lives with his cat, and is fairly eccentric—his main passion in life is participating in dodgeball tournaments. He has already run through 3 different franchises and came close to being indicted for Internet stock fraud when he was only 16. He is, however, a marketing genius—he is the brains behind 3 of the great marketing ideas of the last 3 years. He has never saved a cent—his personality is such that he ends up alienating his employees or partners and because he does not trust attorneys, he has never gotten the ironclad legal agreement that would protect him when these partners throw him out of the business.

Steve and Ben meet at a cat show, and although they really don’t know each other well, they recognize that each has what the other needs, and they decide to go into business together. Steve at first wanted to just hire Ben as a marketing consultant, but Ben does not want to just be Steve’s employee. Ben wanted to take an option on Steve’s invention, but that was not agreeable to Steve. Some sort of business formation is the key, but the question is what form of business? Lucky for Steve and Ben, you are in the picture. You are an attorney/business consultant hired by one of the above individuals to represent him and counsel him. It is up to you to decide the best type of business for whichever individual you are assigned and write a persuasive letter (of 2 to 4 screens) to your client discussing your decision. Your client will no doubt be astonished and pleased with your insight, and will thereafter authorize you to negotiate on his behalf with the other party to result in a memorandum of agreement (of about 1 screen).

You will no doubt want to consider the following, but you are certainly free to (and encouraged to) discuss any other issues you believe to be pertinent:

· management issues

· liability issues

· taxation issues

· inheritance issues

· nepotism

If you opt for a partnership form, you will need to discuss what law you are using and what provisions will be addressed in the partnership agreement.

If you opt for the corporate form, you will need to discuss what roles each individual will play, distribution of shares, etc.

Post 1

For this case, I recommend a partnership. Partnership is a business formed between two or more people to share profit and risk. Because of the facts presented in this case, neither Ben nor Steve liked too much legal work and lawyer involvement, and both in previous projects Having worked with a partner, the partnership form is easy to form. In this partnership, both parties can become owners based on the investment, skills and knowledge in the business.

Limited Partnership is better for both of them. Limited Partnership (LP) – is a partnership that grants limited liability to some partners (limited partners). Limited partners are not liable for business liabilities. LP’s must have at least one general partner. Limited partners do not play an active role in the business. Limited partners contribute capital to the business but have little control over business decisions or operations, and generally cannot bind the partnership to business transactions. Steve’s problem is that he’s morbidly shy, doesn’t know how to bring his product to market, but has already made huge sums from previous projects; and Ben is a marketing genius who’s never saved a dime. Well, Steve can contribute to the business and he can be the main owner. Instead, it could be the managing partner who manages the company’s marketing and other business activities. Both can play their part based on their strengths and investments.

Limited partners are not personally liable. In return for Steve relinquishing management, LPs benefit from personal liability protection. If a limited partner begins to take an active role in the business, that partner’s liability may become unlimited.

Profit distribution will be based on contributions to the organization, and in the event of losses, losses will also be apportioned by contribution. But beyond that, Ben should be given the salary to run the organization as a manager. Limited partners face slightly different tax rules. For income tax purposes, a limited partnership is usually treated as a general partnership, with all partners reporting and paying their share of profits separately each year. Limited partners generally do not have to pay self-employment tax; because they are not active in the business, their share of partnership income is not considered “income” for self-employment tax.

One option is for a wife or husband or adult children willing and able to step up and take over the former partner’s share of your operation. If this is the case, you just need to formally bring your new partner on board and start the process of learning how to work together.

After one of them dies, if no one in the partner’s family has the ability to inherit, the other partner can buy out your former partner’s shares at the current market value.

Nepotism is hard to avoid, Steve has two children who seem to have inherited Steve’s interest in technology, and they can invent products together with Steve, but they only get paid for their contributions, not businesses profit.

Steve and Ben both have what the other needs and the Limited Partnership is the best fit for them.

Post 2

Ben, it is our understanding that you would like to create a business entity with Steve, and need guidance on selecting the appropriate entity type.  There are several issues to consider which will influence our decision on entity type.  In our opinion the LLC is the ideal entity type for your business endeavor, and below are some of the key reasons for choosing the limited liability company.

Firstly, we need to choose an entity type which offers limited liability to owners.  This narrows our decision down to two choices, either corporation, or LLC.  Both entities generally limit the liability of owners for debts and obligations of the business to the owner’s capital in the business (Twomey et. al p 857).  This works for both parties, as Steve will not want to put his own personal assets at risk.  Most importantly, you have very little in terms of personal assets, we do not want to put what little resources you do have at risk by a poor management decision made by the business.

As for management, you are young and inexperienced when it comes to business management.  There is no way that Steve would concede to allowing you to have a major management role in the business.  Therefore, we need to pursue an entity type that can allow you to secure a significant ownership, of the business while still allowing Steve to make ordinary management decisions.  While the corporate structure allows the election of a board of directors, and allows for differing classes of stock, such as common stock, preferred stock, non-voting stock, etc. the LLC offers more flexibility and customization as to your business relationship (Twomey et. al p 853).  The LLC is therefore the ideal solution, as we are afforded more customization as to the duties and rights of owners through the operating agreement.  Using the operating agreement we will secure you a fair ownership percentage, concede certain management rights to Steve.  Most importantly, we can include a clause which does not allow Steve to remove you (or any other member) arbitrarily and involuntarily.  We will also include conflict resolution clause, as I understand you had encountered issues with prior business partners forcing you out of your previous partnerships.  This time, with a solid operating agreement you will not be pushed out of the business.

One thing you and Steve can agree on is you want to avoid double taxation.  We can achieve this by either going with the S-Corporation, or LLC.  Regular corporations are taxed at the corporate level, as well as the shareholder level, so this type of corporation is not ideal for either party.  The downside to the S-Corporation is the 100-shareholder limitation placed on S-Corporations (irs.gov).  Your new product is expected to be hugely successful.  I foresee the possibility that the company will greatly exceed 100 shareholders.  If this is the case, when the corporation exceeds 100 shareholders it’s “S” status will be terminated subjecting you and Steve to double taxation.  This is not in the best interest of either party.  The LLC on the other hand has no limitation on number of owners or type of owners (Twomey et. al p 858).  In addition, the S-Corporation only does not allow more than one class of stock (irs.gov), stock class limitations limit what we want to achieve with customization.  For these reasons, there is an inherent risk that we lose “S” status and revert back to double taxation.  Thus, the LLC is the superior entity type for tax planning purposes.

Finally, although you do not have any children, Steve has five, and inheritance issues are likely on the top of his list when it comes to choosing an entity type.  Luckily the LLC and the corporation are both equally efficient for Steve to pass his ownership to his children and grandchildren, so we do not need to compromise on the decision to choose the LLC.  Both entity types have perpetual existence, so unlike the partnership the LLC doesn’t “dissolve” upon the death of a partner (wolterskluwer.com).  Therefore, if Steve argues against the LLC due to inheritance issues the LLC should have no such issues, as ownership rights will rightfully pass to his estate upon death.  In addition, we will request a provision in the operating agreement requiring a unanimous vote to add any new member to the LLC.  Members must agree on the buy in price, profit/loss percentage share, and other key attributes of the new member which will be listed in the updated operating agreement.   This way Steve cannot singlehandedly bring in his children as owners at an unfair price, diluting your ownership share.

In conclusion, the only two ideal entity types are the S-Corporation, or the LLC.  Both have similarities which include limited liability for members/shareholders, as well as a single layer of taxation (Twomey et. al p 866).  The main appeal that the LLC has over the S-Corp for is that we might be afforded more customization through the operating agreement, which works for both sides.  We can come up with solutions for management, profit sharing, and dispute resolution. which are ideal for you, and acceptable for Steve.  The S-corporation runs the risk of reverting back to double-taxation, where the LLC does not, and there are no downsides when it comes to the LLC in relation to estate planning.  Ultimately there is no question that limited liability company is the best choice for your new business venture. 

References

Twomey D., Jennings, M., & Greene, S. (2017). Business Law: Principles for Today’s Commercial Environment (5th Ed). Cengage Learning.

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

https://smallbusiness.chron.com/sell-percentage-llc-50190.html

https://www.thetaxadviser.com/issues/2012/oct/clinic-story-11.html#:~:text=An%20S%20corporation%20election%20may,meet%20the%20criteria%20in%20Sec

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https://www.wolterskluwer.com/en/expert-insights/benefits-forming-limited-liability-company#:~:text=Unless%20the%20articles%20of%20organization,the%20dissolution%20of%20the%20company

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