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.