Jin is an accountant. Nuankae is a sous chef at a successful Spanish restaurant on E. 68th

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Question:

Jin is an accountant. Nuankae is a sous chef at a successful Spanish restaurant on E. 68th Street, called “Que Lastima.” Jin and Nuankae (who likes to be called “Kae”) both enjoy Louisiana cuisine and met at a cooking class. They decide to open a small restaurant on W. 68th Street, called “Kae-Jin Cookin.’”

Jin and Kae meet with you to seek advice on how to establish their business. They do not expect to earn a profit in the first year or two of operation. Their principal expenses will be rent, salaries and food purchases. They expect to require about $200,000 to cover expenses over income for the first year of operation. Jin has $100,000 available; Kae $50,000. They can make up the $50,000 shortfall either through a bank loan or from Kae’s uncle, “Dutch,” a retired wine importer. Dutch is willing to provide these funds as either a loan or investment. Jin believes that the bank which is willing to make the loan may require personal guarantees from Jin and Kae.

Kae plans to quit her job at Que Lastima and can devote 100% of her time to managing the restaurant. Jin wants to continue working as an accountant but is willing to handle the restaurant’s financial affairs and offer recipes.

Jin and Kae and ask you how they should proceed. Write a short memorandum addressing the following:

Under what form of business do you suggest they operate?

What steps should they take to create such an entity?

How should they obtain the funding necessary for their first year of operation?

How should they manage the business?

Outline the principal terms of an agreement that reflects the intentions of Jin, Kae, and any other participants or investors, on the issues of ownership, management, compensation, sharing of profits and losses, dissociation and buy-out.

You are tasked with conducting an audit of the business of “Kae-Jin Cookin” after its first year of operation. You discover the following:

A file containing letters from Overpriced Properties, LLC, the restaurant’s landlord, seeking a fifty percent increase in rent for next year. You ask Kae about this and she tells you she thinks she can negotiate a new lease for only a twenty-five percent increase since she is a ten percent owner of Overpriced Properties, LLC. You ask Jin about this and he tells you he did not know about Kae’s ownership in Overpriced Properties, LLC.

Jin has made transfers of “Kae-Jin Cookin” funds to a company called “X Factor LLC.” You ask Jin about this and he tells you these were short term loans to a sports fitness business in which he has invested and that all amounts will be repaid shortly. You learn from Kae that she knows nothing about these loans.

A file entitled “Trademarks” which reflects that Kae has made a filing with the U.S. Patent and Trademark Office for the trademark “Kae-Jin Cookin.’” She has made the filing in her own name. You ask Jin about this and he tells you he knows nothing about it.

Jin tells you he has recently been in a car accident in which his car was heavily damaged. He says he drove to northern New Jersey to meet with a prospective provider of vegetables for the restaurant. After the meeting, Jin drove to Philadelphia to meet an old college friend. The accident occurred in southern New Jersey just before the border with Pennsylvania. Jin advises you that he expects “Kae-Jin Cookin” to reimburse him for the damage to his car.

In the restaurant’s tax filings, Jin has characterized all restaurant employees as “independent contractors.” You ask Jin about this and he tells you he did this to save money, mostly to avoiding paying employee benefits, and to avoid liability “if they do something wrong.”

Write a brief memo to your audit partner outlining the issues you see arising from the facts in paragraphs 1-5 above, explaining any potential breaches of obligations or potential liabilities regarding (i) the business and (ii) Jin and Kae individually. Your answers should be based on the form of business you selected in Essay No.1.