You have represented Ed for many years in his computer consulting business. Ed has been developing a new video game called Cyclops. Two of Eds friends, Bill and Ted, are interested in joining Ed in a business venture that will develop and market Cyclops. Ed has spent most of the last eighteen months developing the game and is nearing completion on the first phase. The game will be ready for its first real testing in a few months but it still has numerous program bugs.

Ed estimates that he will need at least $1,000,000 to finance the production of the game. Bill and Ted are willing to contribute a substantial amount of this capital but want some preference on eventual earnings if any exist. Ed wants to retain day-to-day control of operations and development. They are all insistent that the game will be successful and profitable. In order to distribute the finished version, however, they will require a great deal more capital. Ed has ideas for additional versions of Cyclops. All of this may require additional shareholders; therefore, access to capital markets is important to this venture.

• What entity options are available for them to use?
• What are the nontax considerations to evaluate? Explain in detail.
• What are the tax considerations to evaluate? Explain in detail.
• What entity type do you recommend and why? Explain in detail.