Sarah and Wei have an opportunity to buy a large parcel of land on the Willamett

Question

Sarah and Wei have an opportunity to buy a large parcel of land on the Willamette River, just two miles south of Salem. They want to build an amusement park on the land. Sarah approaches you and says, "Hey, I know you took that BA 333 class, so maybe you can help me figure out what to do. Wei and I need a lot of money to start up our amusement park and buy the land we want, and we're a little nervous about getting sued if someone gets thrown out of our roller coaster. What kind of business do you think we should we set up? We were thinking maybe we could just be partners. We'd prefer not to have anything formal written down--we think that might be bad for our friendship. What's your advice?"

Draft an answer to Sarah and Wei and include it in your document. Your answer should include: 1) your recommendation for the best entity choice; 2) a complete explanation of why this is the best option; 3) a secondary recommendation, in case Sarah and Wei don't like your first option; 4) an explanation as to why this is your second choice (i.e., compare to your first choice and explain why this is not as good, but still an acceptable option).

Explanation / Answer

Amusement parks need heavy initial investments and huge amount of working capital every year for routine operations. Forming a partnership type of business organization is out of question for starting an amusement park because both the partners would not be able to generate the capital to initiate the amusement park. Forming a corporation type of business is the best available option as it can raise capital through shares in the ownership rights of the corporation. Also the liability of a partnership firm is unlimited and can come upon the partners personal assets in case of legal issues or liquidation, the corporation established would be a separate entity in the eyes of law and hence would have liability limited to the assets owned by it. There are two types of corporations that can be formed:

C Corporation & S Corporation

Both the corporation styles have similarities in the form of limited liabilities, separate entities, documents filing, corporate structure and formalities etc. However, they are different when it comes to the corporate ownership and taxation aspects of business. C corporations have no restrictions on ownership but S corporations are restricted to no more than 100 shareholders and the shareholders must be US citizens/residents. Other C corporations, S corporations, LLCs, partnership firms, or any trusts cannot be owners of an S corporation. S corporations are also limited to one class of stock whereas; C corporations can have multiple classes. Hence, C corporations give an advantage of flexibility of raising more funds for starting a business. Income from C corporations are taxed at two levels one at the corporate level and other at individual level whereas; that of S corporations are pass-through taxable entities. The profit earned by a C corporation is taxed and also the dividends or salary drawn by the owners if any, are taxed on their individual returns. For S corporations, there is no corporate level tax but the income distributed among the owners is taxed on their individual returns.

First recommendation – C corporation

Second recommendation – S corporation

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