Moe, Larry, and Curly are in the process of forming Oliveology, a company that hasdeveloped a natural
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Initially, Moe, Larry, and Curly are looking to capitalize on the entity with each putting up $500,000of their own money. Given their other sources of income, they each are currently in the 35%federal tax bracket without considering any income from this newly formed entity.The early stage/development of Oliveology will require Moe and Larry to spendconsiderably more time at the business than Curly due to their skill sets and expertise in marketdevelopment. Once they have reached a profitable level, the workload should be equal among the three owners.With assistance from the accounting firm of Dewey, Cheatem, and Howe, they havedeveloped financial projections for the next ten years. They are projecting losses for the firstthree years of about $100,000 to $150,000 per year. After that initial three-year period, they are
projecting income of about $450,000 to $500,000 per year. These bottom line figures are afterconsideration of any annual compensation that the owners will pay themselves.
They anticipate a growth mode for the first eight to ten years of operations and willfinance this initially through their capital contributions and then subsequently through internallygenerated profits. During this time period, they will probably add eight to ten stores per yearwhich will be spread out over two to three states. By year ten, they anticipate having 80 to 100stores in approximately 16 states.The expansion mode should level off after ten years. Once they have achieved this leveland have provided adequate working capital for the business, they may start taking additionalcompensation or distributions depending on the overall financial condition of the business.
Recognizing the advent of competition and the maturation of the market for this type ofproduct, they may consider an exit strategy in between years 12 and 15. This exit may arise inthe form of an IPO, an acquisition by a competitor, or a private equity group targeting it as aninvestment. In any event, they all agree that disposing of the business as it approaches the peakoperating years is critical to their long-term goals of a fully funded retirement.
Required: Which business entity should Oliveology organize as either a C Corporation, S Corporation, orLimited Liability Company? It should also point out the weaknesses of this type of entity as well as why this entity type is superior to the other entity types.
Related Book For
Public Finance In Canada
ISBN: 9781259030772
5th Canadian Edition
Authors: Harvey S. Rosen, Ted Gayer, Jean-Francois Wen, Tracy Snoddon
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