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Dawn Taylor is currently employed by the state Chamber of Commerce

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Question;Chapter;15, Comprehensive Problem 83;Dawn Taylor is currently employed by the state;Chamber of Commerce.;While she;enjoys the relatively short workweeks, she eventually would like to work for;herself rather than for an employer. In her current position, she deals with a;lot of successful entrepreneurs who have become role models for her. Dawn has;also developed an extensive list of contacts that should serve her well when;she starts her own business.;It has;taken a while but Dawn believes she has finally developed a viable;new;business idea. Her idea is to design and manufacture bed sheets that;have;various colored patterns and are made of unique fabric blends. The;sheets;look great and are extremely comfortable whether the bedroom is;warm or;cool. She has had several friends try out her prototype sheets and;they have;consistently given the sheets rave reviews. With this encouragement, Dawn;started giving serious thoughts to making ?Color;Comfort;Sheets? a moneymaking enterprise. Dawn had enough business background to;realize that she is embarking on a risky path, but one, she hopes, with;significant potential rewards down the road. After creating some initial income;projections, Dawn realized that it will take a few years for the business to;become profitable. After that, she hopes the sky?s the limit. She would like to;grow her business and perhaps at some point ?go public? or sell the business to;a large retailer. This could be her ticket to the rich and famous.;Dawn, who;is single, decided to quit her job with the state Chamber of;Commerce;so that she could focus all of her efforts on the new business.;Dawn had;some savings to support her for a while but she did not have any other source;of income. Dawn was able to recruit Linda and Mike to join her as initial;equity investors in CCS. Linda has an MBA and a law degree. She was employed as;a business consultant when she decided to leave that job and work with Dawn and;Mike. Linda?s husband earns around $300,000 a year as an engineer (employee).;Mike owns averyprofitable used car;business. Because buying and selling used cars takes all his time, he is;interested in becoming only a passive investor in CCS. He wanted to get in on;the ground floor because he really likes the product and believes CCS will be wildly;successful. While CCS originally has three investors, Dawn and Linda have plans;to grow the business and seek more owners and capital in the future.;The three;owners agreed that Dawn would contribute land and cash for a;30 percent;interest in CCS, Linda would contribute services (legal and business advisory);for the first two years for a 30 percent interest, and Mike would contribute;cash for a 40 percent interest. The plan called for Dawn and Linda to be;actively involved in managing the business while Mike would not be. The three;equity owners? contributions are summarized as follows;Adjusted;Dawn;Contributed FMV Basis Ownership Interest;Land (held;as investment) $120,000 $70,000 30%;Cash $ 30,000;Linda;Contributed;Services $150,000 30%;Mike;Contributed;Cash $200,000 40%;Working;together, Dawn and Linda made the following five-year income;and loss;projections for CCS. They anticipate the business will be profitable and that;it will continue to grow after the first five years.;Color;Comfort Sheets 5-Year Income;and Loss Projections;Year Income (Loss);1 ($200,000);2 ($80,000);3 ($20,000);4 $60,000;5 $180,000;With plans;for Dawn and Linda to spend a considerable amount of their;time;working for and managing CCS, the owners would like to develop a;compensation;plan that works for all parties. Down the road, they plan to;have two;business locations (in different cities). Dawn would take;responsibility;for the activities of one location and Linda would take;responsibility;for the other. Finally, they would like to arrange for some;performance-based;financial incentives for each location.;To get the;business activities started, Dawn and Linda determined CCS;would need;to borrow $800,000 to purchase a building to house its;manufacturing;facilities and its administrative offices (at least for now). Also, in need of;additional cash, Dawn and Linda arranged to have CCS borrow $300,000 from a;local bank and to borrow $200,000 cash from Mike. CCS would pay Mike a market;rate of interest on the loan but there was no fixed date for principal;repayment.;Required;a.;Identify significant tax and nontax issues or concerns that may differ;across;entity types.;b. Provide;your recommendation for forming CCS as a C corporation, S;corporation;LLC, or partnership. Explain your reasoning for your choice;of;entity, identify any issues that you may still be concerned about, and;suggest;recommendations for dealing with the concerns.

 

Paper#39533 | Written in 18-Jul-2015

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