George, Kim, Martha and Tom have decided to open a Polynesian restaurant

Background

George, Kim, Martha and Tom have decided to open a Polynesian restaurant

that specializes in Oriental food and tropical drinks.

George has no personal savings to invest; however, he has a bartender’s license as

well as seven years of experience as an assistant manager at a large restaurant. Plans

to work full-time co-managing the restaurant with Martha.

Kim recently inherited $500,000 and is interested in investing up to $250,000 of it in a

business opportunity. However, as a full-time medical student, Kim has neither the time

nor the desire to operate the business.

Martha has personal savings of almost $80,000 and is willing to invest up to $60,000 of

it in the restaurant. She also wants to set the remainder aside for her son’s future

college expenses. She plans on working full-time with George as co-manager of the

restaurant.

Tom is the owner of The Home-Cooked Meal restaurant which he operated for 10 years

but recently closed. The Home-Cooked Meal was operated as a C corporation. It has

furniture, fixtures and equipment (FF&E) with a FMV of $300,000 and adjusted basis of

$40,000. The new restaurant can only use $250,000 (FMV) of the assets. Tom also

owns the land and building where The Home-Cooked Meal operated and the parties

believe that it is a great location for the new restaurant. The Building has a FMV of

275,000 and adjusted basis of $165,000; the Land has a FMV of $50,000 and adjusted

basis of $50,000, the property is subject to a mortgage of $200,000.

The parties have discussed two alternative ownership/contribution structures:

Alternative Structure 1:

The proposed ownership interests and contribution are as follows:

Ownership Interest Contribution

George 15% Personal Services

Kim 25% $150,000 Cash

Martha 10% $ 60,000 Cash

Tom 50% $250,000 of the FF&E

Alternative Structure 2:

The proposed ownership interests and contribution are as follows:

Ownership Interest Contribution

George 15% Personal Services

Kim 25% $250,000 Cash

Martha 10% $ 60,000 Cash and Personal Services

Tom 50% Tom will contribute $250,000 of the

FF&E plus Land & Building FMV

$325,000

Tom will receive $75,000 cash

Payment from the Business.

ISSUES

Part 1. Alternative 1

With regard to Alternative Structure 1, evaluate which of (a) a General Partnership,

(b) LLC or (c) Corporation would be the appropriate form of doing business for each

person above with regard to the following Issues of (i.) ease of formation, (ii.)

management, (iii.) liability for the business’s liabilities, (iv.) the transferability of the

ownership interest, and (v.) the basic federal income tax advantages or

disadvantages for each of the three forms of doing business.

NOTE: Do not discuss any other forms of doing business or any issues other than

those set forth in this Part 1.

Part 2. Alternative 2

With regard to Alternative Structure 2, evaluate which of (a) a General Partnership,

(b) LLC or (c) Corporation would be the appropriate form of doing business for each

person above with regard to the following Issues of (i.) ease of formation, (ii.)

management, (iii.) liability for the business’s liabilities, (iv.) the transferability of the

ownership interest, and (v.) the basic federal income tax advantages or

disadvantages for each of the three forms of doing business.

NOTE: Do not discuss any other forms of doing business or any issues other than

those set forth in this Part 2.

Part 3. Your Recommendation.

Which would you recommend? Explain your recommendation.