Question

Ripley, an individual; Jones, an individual; and Weyland Incorporated, a California corporation; are planning to enter into a joint venture together. They would like this joint venture to be operated as a separate legal entity. They have come to you, a certified public accountant, in hopes that your firm would provide tax reporting services for this new venture. In addition, they would like to know your preference on the best form of entity to operate this new venture. Here are some of the items they would like you to consider in recommending a form of business entity: Ripley and Jones would like to have limited liability for joint venture activities. Weyland would like the legal entity to exist in perpetuity. Jones would like to minimize federal income tax for distribution of operating earnings to the owners. Ripley would like minimization of administrative burden. Ripley and Weyland may sell their ownership interests in 2 years. The new joint venture is expected to make losses during its first two years of operation. Please prepare a one-page memo summarizing your recommendation. As part of the memo, include a matrix of entity types and characteristics to see which entity type best meets all or most of the preference items for the potential owners. Review the grading rubric to understand how you will be graded on this assignment.

Answer 1

As a certified public accountant, i would suggest Ripley, Jones and representative of Weyland incorporated to form a business corporation for the purpose of this joint venture. Firstly lets note down all of their recommendations:-

1. Ripley and Jones i.e.both individuals in joint venture want like to have limited liability for Joint venture activities.

2. Weyland Inc. would like the entity to exist in perpetuity.

3. Ripley would like to minimize administrative work on himself and Jones want to minimize federal income tax for distribution of operating earnings.

4. Ripley and weyland may sell their ownership interest in next 2 years.

So lets take look on what type of entities are available for formation of joint venture with their characteristics:-

Type of entities	Relevant characteristics
1. General Partnership	Easy to start up (no need to register your business with the state). No corporate formalities or paperwork requirements, such as meeting minutes, bylaws, etc. You don’t need to absorb all the business losses on your own because the partners divide the profits and losses. Owners can deduct most business losses on their personal tax returns. Each owner is personally liable for the business’s debts and other liabilities. In some states, each partner may be personally liable for another partner’s negligent actions or behavior (this is called joint and several liability). Disputes among partners can unravel the business (though drafting a solid partnership agreement can help you avoid this). It’s more difficult to get a business loan, land a big client, and build business credit without a registered business entity.
2. Limited Partnership	An LP is a good option for raising money because investors can serve as limited partners without personal liability. General partners get the money they need to operate but maintain authority over business operations. Limited partners can leave anytime without dissolving the business partnership. General partners are personally responsible for the business’s debts and liabilities. More expensive to create than a general partnership and requires a state filing. A limited partner may also face personal liability if they inadvertently take too active a role in the business.
3. Business Corporation	The corporation exists separately from its shareholders, directors and employees. A corporation is a 'person' in the eyes of the law. A corporation functions in the same manner as a person and has the same rights and responsibilities as a person. The corporation may make contracts, assume liabilities, sue and be sued. The corporation and its shareholders and directors have specific duties and obligations to each other. Liability of shareholders is limited to the amount of shares held by them. Centralization of Management Shareholders can transfer ownership interests Continuity until dissolved according to law
4. Limited Liability Company	Owners don’t have personal liability for the business’s debts or liabilities. You can choose whether you want your LLC to be taxed as a partnership or as a corporation. Not as many corporate formalities compared to an S-corp or C-corp. It’s more expensive to create an LLC than a sole proprietorship or partnership (requires registration with the state).

Now lets analyse all the point put together with benefit of creating a business corporation:-

1. Each member of business corporation has limited liability upto the amount of shares held by them so first concern of Ripley and Jones is done here.

2. Business corporation is a separate legal entity and a person in eyes of laws. it will be continued till dissolved as per law so entity exist in perpetuity.

3. Ripley can choose any representative and be free from administrative work and due to ability to claim all the expenses tax expenses will be cut down. However in first two years joint venture likely to be in losses their will be no distribution operating income in members.

4. Since Business corporation is a different legal entities and shareholders can sell their interest to anyone in market so anyone can sell their interest.

So all of their problems can be easily solved with creating a business corporation.

Note: However expenses to create a business corporation and to carry out other formalities as per laws will be more expensive than any other format of entity.