Question

In 2019, there is suddenly a health craze and more and more people are seeking vitamins and/or health foods to stay fit and healthy. You and your best friend (Julie) decide to take advantage of an opportunity. You both have about $5,000.00 a piece saved up that you each want to invest to get a business started. You and Julie decide to start an on-line business selling vitamins and health drinks. You both want equal control of the company, and will invest all your funds equally. You both know that these types of businesses lose money in the first year. BUT - you also know that after the first year profits will be generated, as long as you can attract more capital ($$$) from new investors to keep up with your inventory requirements (vitamins and health drinks that you buy wholesale). You agree that when you decide to seek additional funds, you will bring in new business partners but you don't want them to gain control of the company you started together. Also, 2 additional facts:

i) Julie informed you that she may have only another year or 2 (at most) to live due to a terminal illness. She especially wants to get this business going so that it can provide financially for her daughter and son when she is no longer around to do so, and

ii) You are currently employed full time in a real estate firm where you make pretty good money. You will make a good salary in this real estate job in the first year when your on-line business is started. But after the first year of the on-line business, you want to quit the real estate gig and go full-time with the on-line business to help it prosper.

Question:
What type of business entity would you and Julie decide to form initially, and what factors might lead you to that decision?

Answer 1

For this business, I would like to enter into an LLC initially. LLC or Limited Liability Company is a hybrid entity, that will bring the business some of the best features of corporation and partnerships. LLC will offer me and Julie with liability protection (if the business fails in the starting years), without the double taxation burden. In an LLC, small businesses benefit as, without the double taxation, earnings and losses pass through to the owners and thus are included in their personal tax returns.
Since Julie cannot be part of the business in the long term, LLC format will allow me to add an unlimited number of shareholders (her children in this case along with the other investors we bring in to support our inventory situation). Also, in LLC entity, any member or owners can have a full participatory role in the business, which can be an advantage when Julie leaves and her children want to participate in the business.
Looking after long term participation, I can assume the role of managing member in the LLC, as I can be daily in charge of operations after I leave my job, and Julie withdraws from the operational side of the business due to her health.
Lastly, LLC requires a lot less paperwork than the other counterparts, and no formalities like shareholder meetings and appointing a board of directors are needed, which can be an advantage given our limited time availability.