Question

Robert e. grant wants to start a company that will offer four-day excursions into northern Georgia, including walking Tours of civil war sites. The package includes transportation to and from base camp in Athens, Georgia, as well as food, transportation and accommodation for a four-day excursion. Before starting his business, Mr. Grant wants to make sure of a few things. First, he wants corporate income to flow directly into his personal tax returns. Second, he will ensure that his personal assets, such as his private home, will not be affected by any legal problems that may arise from all of his businesses, such as client accidents or difficulties in meeting financial obligations. Third, he wants to make sure he retains as much control as possible over the company's business operations. Basically, Mr. Grant needs answers to the following questions:

(1) given Mr. Grant's requirements for the establishment of his business, what type of ownership would you recommend to him? Why is that?

(2) Mr Grant has confirmed that he needs $20,000 to keep the business running, in addition to $10,000 from his personal savings. What type of financing should he seek to obtain the $20,000? Why is that?

(3) Mr. Grant also wants his business to be successful within five years so he can expand to offer Tours to civil war sites in south Carolina, north Carolina and Pennsylvania. He may also be interested in considering business opportunities in the west and taking visitors to famous sites about the frontier. Given the form of ownership you initially recommended to him, what are the important factors he must consider in making this decision? What steps does he need to take to expand his business to other states?

Answer 1

(1): The type of ownership that I will recommend to Mr. Grant is a “single member LLC”. A single-member LLC is merely a limited liability company with a single owner. In case of this entity the corporate income will flow directly to Mr. Grant’s personal tax returns as single member LLCs are disregarded entities and IRS collects the business’s taxes on the owner’s personal tax return instead of on a business tax return. Secondly the personal assets of Mr. Grant will remain protected and will not be vulnerable to the debts of the company. Also as the entity is a single member entity Mr. Grant will be able to wrest and exercise full control over it.

(2): To obtain the $20,000 financing Mr. Grant can seek financing from banks. Banks provide business loans and Mr. Grant can avail a business loan up to $20,000. This will ensure that there is no equity dilution and Mr. Grant has the full control over the company after availing this financing option.

(3): The important factors that Mr. Grant must consider when making expansion decisions is to do a risk trade-off with regards to expansion and the need to wrest full control. In this case once operations expand beyond a certain point it will be in Mr. Grant’s interest to induct more members in the entity and concert it from a single member LLC to a traditional LLC. A traditional LLC will have multiple members and so expansion and the capital need arising from it will be easily met. To expand his business to other states Mr. Grant will have to raise more capital and will have to increase the managerial resources of the company as well so that expansion becomes easy.