Business Formations
For business ethics and dilemmas in the hypothetical
business situations below, discuss the basic elements of business formation:
A. Idea/vision for the business
B. Identify legal and regulatory issues to be considered in
creating/modifying this business
C. What legal entity choice would you make for this business
and why?
Business Situations:
a. Business Situation No. 1
Joe operates a commercial landscaping and tree trimming
business. Joe is very successful and has enough clients to keep him busy, along
with at least 50 workers, working six days a week. Occasionally, a client rents
a piece of equipment from Joe’s business. Clients sometime take their time
paying for Joe’s services and, therefore, Joe is sometimes late paying his
bills. Joe’s capital is only about $250,000, most of which consists of trucks
and earth moving equipment worth approximately $200,000, plus an extensive
assortment of lawnmowers, chainsaws, edgers, and other landscaping equipment. Last
year’s revenues exceeded $500,000. Many of the employees are seasonal and
turnover is high.
Business Situation No. 2
Maury and Sons is an oilfield-drilling contractor. Maury has
been dead for years and Monty and Max, two of Maury’s grandsons, now operate
the business as a general partnership. They contract with companies such as
Exxon-Mobil and BP-Amoco. Last year’s contracts exceeded $1 million in
revenues, an all-time high. The partnership currently employs 50 people on
oil-rig crews and 10 in administrative positions.
Monty and Max each own 25% of the business (they acquired
their interests from their deceased fathers, Fred and Barney). Two aunts, Wilma
and Betty, own the remaining 50%. Wilma and Betty, each in their early 80s,
have no children.
The business was originally a sole proprietorship. Maury
brought Fred and Barney into the business, yet there is no formal partnership
agreement. Wilma and Betty have never been actively involved in the business,
yet were given their interests after Maury’s wife, Mable, passed away.
Monty and Max want to continue to expand the business and,
eventually, sell the business to a “consolidator” (a company that
buys local businesses, usually in exchange for a combination of stock, cash,
and debt).
c. Business Situation No. 3
Three former employees of ChipeX, Inc. have developed a
prototype for a new microchip to power the next generation of personal
computers. They have assurances from venture capitalists that they will receive
whatever financing is needed to manufacture the chip, provided they take 51% of
the ownership interest. The venture capitalists do not want to interfere in the
business operations and have agreed to allow the developers to control the
operations, provided certain financial objectives are achieved. They expect to
begin manufacturing of the chip within two years. Based on outside evaluations,
the chip should be a success. The expectation is that the new venture will go
public, or be sold to investors, within five years.
d. Business Situation No. 4
Five friends have gotten together to form a commercial
construction business. Two of the friends have sizeable assets, but little
construction experience. These two also have some experience in running
companies. The other three friends have a small amount of capital to invest.
Their major contribution to the group is that all three formerly worked for
very successful homebuilders, and one individual headed the local division of a
national construction company for the past two years.
Even with their combined savings, the group realizes that
they will need to either obtain bank financing or outside investors. Bank
financing will require that the five friends put up their personal assets as
collateral. Outside investors will not demand personal collateral, but will
demand control. The five friends believe that the company will be a success.
Yet, even without having to give a bank personal collateral, they are concerned
that if the business fails, they could lose everything they have accumulated.
