SCENARIO: Gloria Smithson and her husband Joe have created a revolutionary widget that they believe will revolutionize the industry. Joe Smithson is an engineer, and he and Gloria worked steadily for approximately 1 year to develop the design. They have applied for a patent, which is currently pending. They have created prototypes and are ready to begin looking for manufacturers and accounts. However, they have not yet created a business and are not sure which type of entity will best serve their needs. They want to create a business that can grow steadily and perhaps expand globally. Gloria has researched accounting firms and believes she has found one that will be able to answer all of her questions. She wants to develop a long-term relationship with an accountant who regularly works with start-up businesses and who has global connections.
YOUR ROLE: You are a business planner and accountant. Your expertise is in helping clients evaluate business formation options and business strategy. You have cultivated many international contacts in a variety of fields, including manufacturing. You believe that you will be able to help Gloria find appropriate manufacturing options abroad as well as companies in several countries with which she might want to partner. You have created an extensive memorandum that outlines the various business entity options, the strengths and weaknesses of each, as well as suggestions concerning global expansion. Gloria has come to you to get some advice on which business entity best suits her needs and objectives.
KEY PLAYERS: GLORIA:Gloria regularly used widgets* in her position as a manufacturing supervisor at Energy Efficiency Ltd. An engineer by education, she spent evenings designing a newer, better, and more efficient widget that would revolutionize the energy industry. When she felt confident that she had perfected the design, she and her husband Joe fabricated a prototype. When the prototype functioned as they intended, they hired a lawyer to file design and utility patent applications. Now, 18 months later, their attorney told them that they have been granted provisional design and utility patents. Gloria is confident that she is ready to start her business, and she wants to quit her current job to do so. Gloria knows the business will start small but believes that it will grow into a multimillion-dollar company with many employees. She wants to minimize the taxes the business pays, and she wants to make sure that she and her family are insulated from personal liability for debts of the business, or liability in the event of injury caused by the widget.
JOE SMITHSON: Joe is Gloria's husband. He is also an engineer and agrees with Gloria that they should start a business, but he is not willing to quit his job at this point to help Gloria. They need to have at least one steady income, and they rely on Joe's job benefits like health insurance and his 401k. They borrowed money from Joe's 401k to manufacture the prototype widget, and they paid the patent application fees and their attorney's fees from those funds.
GERALD: Gerald is Gloria's father. He is retired but is willing to invest some money into Gloria's business. However, he wants to have some control over the business and wants his investment to be considered a loan that Gloria's business would have to repay with interest.
NANCY AND ROGER: Nancy and Roger are childhood friends of Joe's. They learned about the new widget when they were at the Smithsons' home for a BBQ and saw the prototype on the kitchen counter. They are independently wealthy and consider themselves to be venture capitalists; they invest money into new businesses they believe will be profitable. They want to invest money into Gloria's business but don't want to have any day-to-day responsibilities for running the business.
ASSIGMENT INTRUCTIONS:
Gloria is very concerned about insulating herself and her family from personal liability. You are a business planner and accountant. Gloria has come to you to get some advice on which business entity best suits her needs and objectives. For this assignment, you will prepare a three- to four-page memo to Gloria Smithson to advise her on which business entity you recommend she choose based on her situation and your research.
Prepare a paper that addresses the elements below.
- Identify three business formations that you believe Gloria could consider as appropriate for her business.
- Define each chosen business formation.
- Explain at least three pros and three cons for each potential business formation.
- Using the course material and the DeVry Library, research which business formation would best insulate Gloria and her family from potential liability.
- Your paper will be graded using the Week 3 You Decide Rubric.