Business Essay Sample: The Problem of Forming Legal Entities

According to this case, Dakota Beach was once a thriving summer resort community. However, it has fallen into disrepair losing its vacation trade. Nevertheless, the area still holds many natural amenities, for example, a deep clear lake, a mild climate, and an attractive rolling countryside that would be attractive to vacationers. The residents of Dakota Beach, namely, Stephanie Kowalski, Matthew Dugan and Rose Clipman think they have identified a way of building up the vacation trade. Stephanie owns the Grand Hotel as a sole proprietor. The hotel buildings are still very sound although many of the accommodations and amenities are outdated. Therefore, to bring the hotel up to the standards of a first-class hotel, an essential aspect to attract more trade, Stephanie needs at least $1,200,000 for renovations. According to the three parties, the current fair market value of the hotel structures is approximate $1,000,000, and the value land on which it stands is about $220,000.

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On the other hand, Matthew is the owner of the land surrounding the Grand Hotel. He financed a sizeable portion of the purchase price and raised the amount of liabilities to which the property is subject to pay for its carrying costs. The trio feels that the fair market value of the asset is 2,400,000. Rose is one of the most innovative resort planners and managers in the state and was previously the executive vice-president and manager of Sea Pines Resort. She recommends some renovations that would make Grand Hotel achieve the first-class standards.

However, according to her plan, the hotel, and Matthews land must be owned or controlled by the same company. Rose believes the entity can finance the renovations to the hotel and the construction of the recreational facilities. However, she would contribute $600,000 while an additional $1,200,000 can be raised from approximately 30 investors while the remaining $2,000,000 is borrowed from a bank. Consequently, Stephanie and Matthew agreed that they would each contribute the Grand Hotel and the land respectively for one-quarter interest in the entity. Similarly, Rose would provide the $600,000 and her services in return for a one-quarter interest in the company. Consequently, they have considered using the entity as a limited partnership, a limited liability company or an S Corporation.

Problems Faced by the parties if they form a Limited Partnership or a Limited Liability Company

Limited partnerships and limited liability companies are companies with more than one owner. In these companies, partners manage the entity jointly and share in its gains and losses on the ratio of their contribution. However, unlike general partnerships, limited partnerships and limited liability companies offer some partners limited personal liability for the entitys obligations (Schneeman, 2013). In limited partnerships, at least one of the owners is considered a general partner, notably, Rose Clipman in this case study. However, a limited liability company, an entity combines some aspects of a corporation and some elements of a partnership. Problems do arise when business owners decide to operate their business as either a limited partnership or a limited liability company. In both types of businesses, the partners carry the burden of all organizations debts and obligations (Cartano, 2008). Accordingly, these entities incur pass-through tax. Additionally, since operating as either an LP or LLC involves investors, then compliance challenges arise relating to annual meetings and detailed partnership contracts.

Problems Faced by parties if they form an S Corporation

If the parties decide to operate as an S Corporation, they will face some problems too. First, compliance issues will arise relating to the need to file federal documents, for instance, Articles of Incorporation. Second, all the shareholders will be liable for tax even if they do not receive dividends (Schenk, 2013). Additionally, the trio will be required to make a salary to all its owners even if it is not yet making any profits.

Balance sheet for the Corporation

Assets

Adjusted ValueFair Market Value

($x1000)($x1000)

Hotel Buildings 5001,000

Stephanies Land 100 220

Matthews Land 9002,400

1,4003,620

Liabilities

Adjusted Value

($x1000)

Stephanies payables 20

Matthewss Liabilities 1,200

1,400

Recommendation

Following a review of all the problems associated with the three types of entities, it is advisable for the partners to operate as limited liability. First, only general partners manage the body. Consequently, only Stephanie Kowalski, Matthew Dugan, and Rose Clipman will run the company without consulting the limited partners. Second, the entitys gains and losses flow through the company to the partners, who are then taxed on their personal income. Notably, the limited partners get to share in the profits and losses of the partnership although they do not participate in the business. Finally, the limited partners liability is limited to the amount of property an individual partner contributes to the entity.

Should they form an LLC or a Corporation?

Stephanie Kowalski, Matthew Dugan, and Rose Clipman should form a limited liability corporation. The main reason is to avoid double tax. Furthermore, as a corporation, the entity would be liable for corporation tax, and once the partners share in the companys income, they will be a responsible individual tax on their shares of gains and losses (Cartano, 2008). Additionally, operating as an LLC will shield the owners and shareholders from personal liability in case of debts against the entity.

Conclusion and Recommendation

To conclude, Stephanie Kowalski, Matthew Dugan, and Rose Clipman have a wide array of options on the kind of entity they can operate. Notably, each option has its advantages and disadvantages although operating as a limited partnership suffices as the best choice. Furthermore, it protects the owners from double tax and shields them from personal liability in the occasion debts arise against the entity. Therefore, it is recommended that Stephanie Kowalski, Matthew Dugan, and Rose Clipman operate as limited liability.

References

Cartano, David J. (2008). Federal and State Taxation of Limited Liability Companies 2009. Cch Inc.

Schenk, D. H. (2013). Federal taxation of s corporations. Place of publication not identified: Law Journal Seminars Pr.

Schneeman, A. (2013). The law of corporations and other business organizations. Clifton Park, NY: Delmar Cengage Learning.