“Sir, after seeing two members of my family ravaged by pancreatic cancer, I left

Question

“Sir, after seeing two members of my family ravaged by pancreatic cancer, I left my job as a chemist and began inventing a cure in my homemade lab. Just last week I think that I have found a formula that works. Though I may be brilliant from a science perspective, I am not so much when it comes to business matters. I have been experimenting for the last five years with personal funds and gifts from local friends, family and business folk who have believed in my abilities. Seeing as how I may have the cure to pancreatic cancer, this is going to big. I need to get the word out, get testing and production started, consult /hire some business professionals to run the enterprise and raise additional funds, because this discovery is huge. I have twenty key investors lined up to help and I’m sure more will be interested once word of this gets out. The investors on board do want to get the best bang for their investment buck on this one and are trying to limit the scope of how many people may eventually be involved. Since, they believed in me early, I feel they should reap the rewards. There have also been concerns about personal liability raised by all, including myself, as well as wanting to maximize their investment return. Could you help me with this process? I’m clueless at this point.”

What would be the best form of business? Not including Sol proprietorship,LLP,PA, or PC

Explanation / Answer

Here the factors to be considered while selecting the type of business form are

1.The business form should be able to attract more investors to raise additional fund.

2. Protecting the interest of the investors on board by limiting the number of investors

3. Reward the investors who believed and helped you from the starting.

4. Limit the personal liability for the investors

5. Maximize the investment return

Considering these factors, the best form of business that suits the given scenario would be an S-Corporation. The reasons are as below.

1.S Corporation can issue the stock to potential investors and raise the additional fund required for further expansion.

2. S Corporation does not allow more than 100 shareholders and which helps to protect the existing investor’s interest.

3. S Corporation helps to reward the shareholders in the form of salary and dividends with lower tax rate. The profit is allocated among the shareholders based on the percentage of ownership or the number of shares held.

4. S Corporation provides the limited liability protection for the shareholders and the personal assets of the investors are protected from liabilities of the corporation.

5. The investment return can be maximized as S corporation helps to avoid double taxation. The investors can report their share of profit and loss of the corporation on their personal income tax return and avoid being taxed at the corporate level.

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