From GP to LLC: Making the Right Choice of Entity Decision

By Johnson, Leigh Redd | Journal of the International Academy for Case Studies, August 2015 | Go to article overview

From GP to LLC: Making the Right Choice of Entity Decision


Johnson, Leigh Redd, Journal of the International Academy for Case Studies


INSTRUCTOR'S NOTES

Recommendations for Teaching Approaches

This case focuses on selecting the best form of entity structure given the objectives of the organizers / original owners of a business. Instructors may want to use the case in a business law or entrepreneurship class following review of the laws related to sole proprietorships, general partnerships, limited liability partnerships, limited partnerships, limited liability limited partnerships, limited liability companies, C-corporations and S-corporations. The case specifically incorporates various facts that make some entity choices better than others and eliminates some choices from consideration entirely. The case also requires students to consider the risks of pre-entity formation obligations and issues related to raising capital for a new business venture.

The case also may be appropriate for a course in corporate and partnership tax, as it demonstrates how certain federal tax consequences impact the choice of entity decision. It also incorporates a unique state tax law involving a limited liability entity tax, which demonstrates the necessity of knowing both federal and state tax laws as well as how state law can impact a choice of entity decision. Note that if Peter and Ann were forming their business in a state without a limited liability entity tax, the answers to the potential discussion questions provided below might be different.

Teaching objectives of this case include:

* To provide a scenario that requires students to analyze the relative advantages and disadvantages of the various forms of business entities given the objectives of the organizers / original owners of a business;

* To provide an opportunity for students to provide a recommendation for entity formation after thoughtful analysis of various factors, including managerial control, limited liability and taxation issues;

* To consider the risks associated with pre-entity formation obligations; and

* To evaluate some of the issues related to raising capital in a new business.

As such, after completion of this case, students should be able to demonstrate:

* Mastery of the relative similarities and differences among sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, limited liability companies, C-corporations and S-corporations;

* Ability to recommend a form of business entity given the organizers / original owners objectives; and

* Recognition of issues related to "piercing a limited liability entity" and associated with raising capital in a new business.

The following are potential discussion questions:

1. What are the relative advantages and disadvantages of the various entity forms available to Peter and Ann Northcutt?

2. Given Peter and Ann's objectives, what type of entity structure should Kip Mathis recommend for the bed and breakfast and potentially the waterpark?

3. What potential problems does signing the purchase agreement for the house and renovation contract with the general contractor prior to entity formation for the bed and breakfast create for Peter and Ann?

4. What steps do Peter and Ann need to take to make themselves more attractive for a business loan? How might the bank eventually propose to structure the loan(s)?

5. Assess Alex's proposal regarding the waterpark. Specifically, consider his plan regarding each investor's contribution and relative equity ownership. Is this an opportunity that Peter and Ann should pursue?

In connection with their analysis of Questions 1 and 2, instructors may want to have students use Table 1 below to help them apply the facts of this case to the various entity choices. The graphic application of the facts of the case to the various entity options should enable students to eliminate business entities that are not an option for the Northcutts and compare the benefits and costs of the remaining viable options. …

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