John Shwimmer, a simple Professor of Practice at Friends University, has a life

Question

John Shwimmer, a simple Professor of Practice at Friends University, has a life long dream of owning a winery. He has studied the soils and topography of both New York State and California. It is obvious that California wine and grapes are superior to those of New York; however, there are certain grapes that are able to be grown in New York such as Riesling and Marquette that do well and have reached world acclaim. The cost of land in California is significantly higher in grape growing regions because of the success of other vintners and as such, John has chosen to purchase a 50 acre plot of land in the Seneca Lake region of the Finger Lakes in New York. The soil is very conducive to growing grapes according to a study performed by Cornell’s agriculture management group. The 50 acre purchase has taken most of John’s available cash and so he may need to take on a partner in this venture down the road. Further, he is always open to bringing on other partners in the venture who can bring expertise that John doesn’t have. John wants to start his business on the right footing and has come to your offices for advice on what type of entity he should form for his new business or businesses. Discuss in depth, the types of entities that John could form, the advantages and disadvantages of each with particular emphasis on the tax considerations and which one or ones you would recommend.

Explanation / Answer

Answer: Partnership in which each of the partners is liable for all of the firm's debts, and the actions of one partner are binding on each of the other partners. Partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits; resolve disputes, change ownership and how to dissolve the partnership. Each partner reports partnership income on their individual tax return. Liabilities: LLC is may not be the right businesses if you’re seeking a public or raise capital. LLCs require few ongoing formalities but usually require periodic filings with the state and also require annual fees. LLCs are more expensive to form than partnerships.

Subchapter S corporation, shareholders report their share of corporate profit or loss in their individual tax return. Corporations can raise capital through the sale of securities and can transfer ownership through the transfer of securities. Corporations are more expensive to form than partnerships and sole proprietorships.

Limited Liabilities Partnership could be the best form of organization for the company because i t will provide the company with adequate protection while safeguarding each partner’s personal assets as well. Under this organization each of you will be strictly removed from responsibility from one anthers actions or potential misconducts. Given that the three of you are great friends I find this to be the most attractive quality in an organization. Regardless of the outcome of the business I know that you will all find comfort in the safety of the LLP.In turn I find this will lift any further burden and allow you to all perform your best for this new company. In addition, a LLP will provide flexibility in business ownership. Each partner will have the authority to decide how they will each contribute to the business operations. Managerial duties can be divided equally or separated based on the experience of each partner. In addition, partners who have a financial interest in the company can elect to not have any authority over business decisions yet still maintain ownership rights based on their percentage interest in the company. Therefore, I think LLP could be the best suitable form of organization they can choose.

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