LIT1 – Task 1 (Part A)

Sole Proprietorship: • Single Ownership - The single individual always owns sole proprietorship form of the business. The individual owns all assets and properties of the business and bears the risk of losing or gaining from the business. • No Sharing of Profit – The business is owned by an individual, therefore, all of the gains are directly available for the owner to access immediately. There is no friction between owners • One Man’s Control -­‐ The controlling power in a sole proprietorship always will be the owner. However, the owner is free to consult to whomever he/she likes. • Unlimited Liability -­‐ The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities • Direct Motivation – Since the profits earned goes directly to the owner there is a greater motive to perform. • Ease to form and dissolve – Since the business is not a corporation it is fairly easy to startup and dissolve. • Taxation – The owners conduct a pass through taxation in which the income is reported on the owner’s personal tax return. • Longevity – A sole proprietorship exists as long as the owner is living or until the owner decides to close the business. • Location – The owner has the rights to choose the location of operation very easily because it’s up to their own discretion. General Partnership: • Formation – This type of business is formed when two or more individuals enter into business together. • Taxation -­‐ No local or state filings (other than appropriate tax returns) are required to create this type of partnership. The setup is like a sole proprietorship, a partnership has only one level of taxation. • Risk -­‐ The distinguishing feature of a partnership is the unlimited liability of the partners. Each partner is personally liable for all of the debts of the partnership.

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Dissolving Business – This type of business is easy to close in case the business fails. However, the distribution of assets is complicated. Profit Retention -­‐ The company profits are split among owners Location – Both partners would need to agree upon the business location as they have equal voting rights according to the UPA. Longevity -­‐ The company could continue without one partner but it should be stated in the partnership agreement on how the business plans to handle such events.

Limited Partnership: • Statute -­‐ A limited partnership may be created only in accordance with a statute. If the statute is not followed, unlimited liability may be imposed on all the partners. • Partnership – A limited partnership has two types of partners: general partners and limited partners. It must have one or more of each type. • General Partner -­‐ have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership's business • Taxation -­‐ A limited partnership pays no federal income taxes. Generally it’s a pass through taxation. There are limitations of claiming losses beyond $25,000 per year. • Fiduciary Responsibility -­‐ General partners, as agents, are fiduciaries of the business. Limited partners are not fiduciaries. • Liability – Under the Limited Partnership business setup, the partners have limited liability based on his or her investment in the company • Location – It would be complicated to move this business type to another state due to the state filing requirements and the business could consist of multiple partners • Convenience/Burden – Two issues commonly faced by limited partnership are defective filing and a limited partner’s taking control • Profit/Retention -­‐ Partnerships offer flexibility when it comes to splitting the profit and losses. • Control – General Partners have control on the management of the business • Longevity – A limited partner can withdraw from the company and it will not dissolve.

C-­‐Corporation: • Limited Liability -­‐ Unlike partnerships and sole proprietorships, corporate shareholders are not liable for any of the corporation's debts. • Adding Investors and Selling an Interest -­‐ To add new investors or sell an interest, the transacting parties simply exchange shares. Absent a shareholders' agreement to the contrary, there is no requirement that the other shareholders agree to the transfer, and there is no way that the other

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shareholders can withhold any of the benefits of stock ownership from the new shareholders. Taxation – This type of business is exempt from Federal Taxes Formation and Cost -­‐ Corporations require a greater investment than most other business entities, except for perhaps a partnership or a limited liability company. Create and Dissolve Corporation – It is not easy to build or dissolve a C-­‐ Corporation. Management and Control -­‐ According to law, day-­‐to-­‐day management of a corporation rests with the officers appointed by the board of directors, who are ultimately responsible for the management of the corporation. The board of directors is elected by the votes of the shareholders. Location – Formation in multiple states is fairly simple, it involves filing and paying necessary fees. Convenience/Burden -­‐ Since the business is taxed separately from it’s owners it increases administrative ease. C-­‐Corps are not easy to dissolve Distributions – Any distribution from the earnings and profits of C-­‐Corps is treated as dividends Longevity – C-­‐Corps can last a very long time since there is no individual ownership, the business is owned by shareholders. This will allow the business to continue upon death of a shareholder.

S-­‐Corporation: • Type of Corporation – The S-­‐Corp is a blend of a C-­‐Corp and a partnership. S-­‐Corps are formed much like a C-­‐Corp and have a very similar structure • Taxation Consideration -­‐ Unlike a C-­‐Corp, all income and losses of a S-­‐Corp are attributed pro rata to the owners. This means that there is no ``double taxation" of corporate income like there is with the C-­‐Corp. S corporation shareholder gets taxed on his or her share of the corporation’s profit. • Qualifications -­‐ need to meet certain guidelines to be eligible for S-­‐Corp status. Almost any small business will meet these guidelines, however, so you can just let your accountant or attorney know that you want to form an S-­‐Corp. • Create and Dissolve Corporation – It is not easy to build or dissolve a S-­‐ Corporation. • Liability – S-­‐Corps protect personal assets by incorporation • Location – Formation in multiple states is fairly simple, it involves filing and paying necessary fees. • Convenience/Burden -­‐ Since the business is taxed separately from it’s owners it increases administrative ease. C-­‐Corps are not easy to dissolve • Longevity – S-­‐Corps can last a very long time since there is no individual ownership, the business is owned by shareholders. This will allow the business to continue upon death of a shareholder.

Limited Liability Company: • Type of Corporation – A LLC is a flexible form of enterprise that blends elements of partnership and corporate structures. • Taxation -­‐ For U.S. Federal income tax purposes, an LLC is treated by default as a pass-­‐through entity. • Market Risk – LLC’s are less likely to be “stolen” or acquired • REIT Organizations -­‐ Real Estate companies, each separate property can be owned by its own, individual LLC, thereby shielding not only the owners, but their other properties from cross-­‐liability. • Control and Power – It might be a little confusing based on titles in a LLC regarding who has power. • Liability -­‐ The charging order limits the creditor of a debtor-­‐partner or a debtor-­‐member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent • Location -­‐ State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating agreement provides otherwise. • Convenience – There is less administrative paperwork and record keeping than a corporation. The disadvantage is that it might be difficult to raise capital. • Profit/Retention – Profits are taxed personally on the member level, not on the LLC level . • Control – Business Management is ran similar to a corporation. • Longevity -­‐ A limited liability company is a legal person separate and apart from its owners so its life and its ability to conduct and continue running its business operations are not affected by the capacity or death of any owner.

LIT1 – Task 1 (Part B)

TO: Lavelle Foods

FROM: Robert Jackson, Auditor RE: Business Type Recommendation DATE: March 12, 2012 ******************************************************************************* It has been a pleasure working with you and your team over the past few weeks. I have had the pleasure of working with some talented individuals and I am certain that your company has a bright future. This memo outlines several critical issues that you want to consider prior to creating your corporation. Please read it carefully and/or submit for legal review. Why should Lavelle Foods Incorporate? Operating your business as a corporation provides three basic benefits to a business owner. First, it provides protection from liability. If you are sued in the course of doing business your personal assets are not at risk, just the assets of your corporation. Second, choosing a corporation carefully can provide certain tax benefits to you as the owner of the business. Third, the creation of a corporation provides a certain level of credibility doing business and reflects you are serious about what you do and your company can easily obtain financing. What types of legal entities are there to choose from? Generally, there are four types of business entities to choose from.

1. Sole Proprietor: The first and most simple is the sole proprietorship. In this case you hold your individual self out as a business. The downside to this is there are very few advantages to doing business this way and several big disadvantages. You are 100% personally liable for the debts of the business. Also, some of the tax benefits you are looking for may not be available in this particular way of doing business. 2. Partnership: The second type of business is called a General Partnership Agreement. When you have a partnership two people have agreed to work in business together. Although there are certain tax benefits to a partnership, the downside that each partner is liable for the debt of the other partner. So, for example, if your partner gets sued you are automatically responsible for the debt in most general partnerships. 3. Corporation: The third type is called a corporation. This type of legal entity is the most popular due to its flexibility. It basically provides the ability to protect your personal assets from claims against the business. You have to pick what type of tax structure you elect for the business (subchapter S or C). 4. Limited Liability Corporation: The fourth type of corporation is a limited liability corporation, commonly referred to as an LLC. The limited liability corporation is probably going to be the most popular entity used to do business due to maximum credit protection and maximum tax flexibility. The LLC will provide you the ability, as a business owner, to select how you wish to be taxed while at the same time protecting investors in the business from any type of liability that they may be exposed to as being an investor. For example, if your limited partner is sued, you are protected from their liability. What is recommended for Lavelle Foods? Based on the series of conversations over the past weeks, I am recommending that Lavelle Foods enter into a Limited Liability Corporation (LLC). Why was a LLC recommended? Based on your future growth plans and the current organizational structure, I believe that a LLC would be suitable for your organization. One of the great benefits on an LLC is that they can choose how they wish to be taxed. They can elect to be taxed as an S corporation, a C corporation, or a partnership. If you are starting a company with multiple shareholders and not sure how you will want to be taxed, we usually recommend you choose to be taxed as a partnership. It offers the most flexibility for whatever happens down the road as your business grows. The LLC setup would enable the company to continue in case an owner decides to withdraw or dies. Next Steps Once you have reviewed the memorandum and consulted with legal counsel, please contact me so that we can begin getting your organization setup as a LLC. Once again, it has been a pleasure working with your team and I look forward speaking with you in greater details.

Regards, Robert Jackson Auditor