analyze a startuphow would you select an

Question

Analyze a Startup

How would you select an organizational form for a business? Think about this question as you read the following scenario.

Joe Jones has created a business plan for a new product. He is not certain whether to organize his business as a regular corporation or a sole proprietorship. The following are his forecasted partial financial statements for the first four years of operation of the new venture named Uncle Joe's.

Forecasted partial Income Statement:

	Year 1	Year 2	Year 3	Year 4
Sales	$15,000	$18,000	$23,400	$44,460
Cost of goods sold	8,000	10,000	15,000	21,000
Gross profit	7,000	8,000	8,400	23,460
Operating expenses	3,000	4,500	4,900	12,000
Interest	800	1,800	2,100	4,100
Earnings before taxes	2,200	2,700	2,800	7,900
Taxes	?	?	?	?
Net Income	?	?	?	?

Forecasted Balance Sheet:

	Year 1	Year 2	Year 3	Year 4
Cash and inventories	$30,000	$45,000	$67,500	$101,250
Building and equipment	25,000	32,500	42,250	54,925
Total assets	55,000	77,500	109,750	156,175

Corporate Income Tax Schedule:

Taxable Income	Marginal Tax Rate
$1-30,000	10%
30,001-100,000	18
100,001-400,000	23
400,001-5,000,000	30
Over 5,000,000	40

Personal Income Tax Schedule:

Taxable Income	Marginal Tax Rate
$1-5,000	8%
5,001-20,000	12
20,001-60,000	19
60,001-180,000	25
Over 180,000	33

Using the information on Uncle Joes' finances, answer the following questions:

1. Calculate the net income earned and the taxes that would have to be paid in each year if the new venture is formed as a corporation.
2. Calculate the net income earned and the taxes that would have to be paid in each year if the new venture is formed as a sole proprietorship.
3. Calculate the following ratios for each year and interpret them:
   1. Return on assets
   2. Net profit margin
   3. Asset intensity
4. Joe's firm will need to acquire assets in order to support the projected revenue growth. How would you recommend Joe finance these assets?
5. Do you recommend that Joe form a corporation or a sole proprietorship? Justify your answer.