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Exam Fact Pattern and Questions

What strategies discussed in chapter 2, as well as in the lecture with Lila Jaber, should Alison consider before she quits working for her dad at the umbrella store, and how should she quit to leave on good terms?

Before quitting her job at her dad’s umbrella store and starting her business, Alison should consider various factors that will affect her future. These factors include but are not limited to personal, financial, and professional sacrifices, risks that come with quitting the job, market competition, and customer base for the sector that Alison would like to join. Alison should consider how much she will lose by leaving her job at her dad’s store and evaluate if it is worth it. Professional sacrifice means that Alison will cut short her experience and progress at her dad’s store and start over in her business ventures. On the other hand, financial sacrifices mean that Alison will have to forego the pay she is used to getting as an employee at her dad’s store. If she is starting her business, she will be required to accept low payments over a long period and long working hours for a better, stable, and more productive potential payoff in the future. Alison should also be aware of how the intended market works and the levels of competition, then evaluate her willingness to take high risks for high payoffs altogether.

To quit and leave in good terms means that Alison should maintain her dignity by using the proper procedures rather than disrespect as it will affect her reputation altogether. Before drafting a resignation letter, Alison should first inform her dad before quitting the job about her intentions. She should be honest but respectful about her reasons for quitting the job. In addition, Alison should be prepared for a counter-offer from the dad and respond appropriately to it. It is also essential that Alison pulls through to the last day of her notice as agreed upon earlier with her boss. Finally, Alison must not start her business while still working in the Umbrella store, especially without notifying her boss.

Discuss at least four types of business entities and explain the pros and cons of these entities as they relate to Alison’s music store.

There are different types of business entities, and they determine the structure of an organization and the level of taxing. The first business entity type is the sole proprietorship. The sole proprietorship is the simplest form of a business entity because it is solely owned and managed by one person or a married couple in some cases. In this case, Alison starting her music store without involving other parties qualifies her as a sole proprietor. There is no need to register with the state in a sole proprietorship. However, Alison should secure a business license and permits. This business has its pros and cons. Some of the advantages she will enjoy as a sole proprietor are that it is easy to start, tax filing is easy, she can deduct most business losses on personal tax returns. In addition, no paperwork or corporate formalities like minutes and buy laws are required in a sole proprietorship. The disadvantages of a sole proprietorship include that the owner is personally responsible for all the business’s debts and liabilities. It is difficult to separate personal life from business because the owner does everything. Finally, it’s harder for a sole proprietorship to build business credit without a registered business entity.

The second type of business entity is the general partnership. In general partnerships, the business is owned by two or more people, and all partners actively manage the business and share in the profits and losses. Alison partnering with Vanya or her dad would automatically qualify her business as a general partnership. The advantage Alison is likely to experience for choosing this entity is that it is easy to start as no registration with the state is required; she won’t absorb all the debts and losses on her own because she has business partners, and finally, owners, including Alison can deduct losses from their tax returns. The disadvantages include it is difficult to land more loans, secure big investors, and build business credit without a registered business entity. Disputes among partners can arise and hinder business operations. In some states, partners are held accountable for the negligence of one partner.

The third business entity is the limited liability company LLC. This business structure would fit Alison perfectly because it has the qualities of a partnership and has legal protection of corporations. LLC offers limited liability protection has fewer ongoing requirements and paperwork. The LLC takes positive features from each of the other business entity types. The advantage of an LLC is that owners don’t have personal liability for the business’s debts or liabilities. One can also choose to be taxed as a corporation or a partnership. The disadvantage of an LLC is that it is costly to start a limited liability company because it requires the involved parties to register with the state.

The fourth business structure is the C corporation. This business structure is an independent legal structure besides its owners. Alison can adopt the C corporation because she will still oversee all the activities despite the shareholders like his dad and other investors controlling the corporation. Alison will enjoy the following advantages; she will pay lower self-employment taxes, she will have the ability to offer stock options, which can help you raise funds in the future. This business structure will also exempt her from business liability and debt. The disadvantage of the C corporation is that they are more expensive to start than partnerships and sole proprietorship. They are double-taxed, meaning it pays tax on the corporate tax return, and then shareholders pay taxes on dividends on their tax returns. This business structure has a lot of corporate formalities and paperwork.

Discuss the advantages and disadvantages to Alison regarding the following four scenarios

If Alison decides to use her $10,000, accept Vanya’s $25,000 investment into her business and her father’s $15000 loan to fund her business, she is likely to create a pool of funds that will establish and sustain her business in the long run. Alison will, however, experience prolonged decision-making processes because she will have to involve Vanya and her dad.

If Alison uses her own $10,000 and takes $40,000 from an angel investor, she attracts additional financing to her business. Working with an angel investor will also mean that she gets to make all the decisions regarding the company and is not required to pay interest on the money invested. They also add credibility to the business. The downside of working with an angel investor is that they do not participate actively in business operations, thus making it difficult to understand each other, the entity’s challenges and progress, and general performance.

If Alison uses her $10,000 and takes a $40,000 loan from a local bank, she will increase the finances required for the business. The bank will also offer free advice and money allocation strategies to help the business avoid risks and thrive with time. The bank also gives the business security and enhances its credibility. One disadvantage of involving the bank is they have high loan interest rates. Alison will spend a lot of money as interest to the bank while repaying her loan. The time frame for loan repayment is also fixed, denying room for future adjustment if funds are scarce.

If Alison decides to ask a venture capital firm to invest $50,000 into her business, she gets valuable expertise and guidance on how to run her business successfully. If the startup fails, she has no repayment obligations in this case. In addition, Alison stands an opportunity to expand her business in the long run as the venture capital firm will expose her to a broader market and create more networks and meaningful connections. The disadvantage of working with a venture capital firm is that it dilutes control and ownership. In addition, it leads to an undervaluation of a business as they may release funds from time to time.

If Alison decides to hire an attorney and form a corporation, what should she do and consider when:

Hiring the attorney

Alison should consider the need for an attorney and the cost of hiring one when hiring an attorney. A strategically astute attorney can enhance the enterprise’s bottom line by helping craft the best structure for the business providing sound advice regarding and the legality of various possible courses of action. Choosing an attorney is a personal decision. Therefore, Alison should take her time to survey the market the size of her business and evaluate the character and qualifications of an attorney before settling for one.

Drafting the bylaws for the corporation?

While drafting the bylaws for a corporation, Alison should consider the number of shareholders in her business and the possible conflict of interests along the way. Alison must establish the shall/will for the company and its shareholders. In addition, she should ensure that the bylaws are consistent and agree with her business articles to facilitate easy understanding. Since bylaws determine the legitimacy of a business, Alison should treat it with utmost seriousness in its drafting and implementation.

Divvying up ownership?

In this case, Alison needs to consider the capital investment providers for the businesses. This action will ensure that disputes do not erupt along the way among investors and players in the business. It is also essential for Alison to map down the roles of each player in the business to avoid confusion and increase the business’s productivity.