CHOOSING A FORM OF OWNERSHIP
John and Marcia Howard have just come into a small legacy of $50,000. This money has prompted them to go forward with a lifetime dream of owning their own business, deciding to open a retail apparel shop. They are, however, confused as to which form of business organization would be most appropriate for them. Knowing of your study of this topic at South Puget Sound Community College, they turn to you for advice.
Here is the Howards' situation. They have been married for 11 years and have two school age children. Marcia has been working as a sales clerk at a local clothing shop and has developed a considerable understanding of the business. John is currently a delivery man for a major courier service earning $11.00 per hour. However, he has also taken accounting classes at the college and feels he could easily handle the financial aspects of the proposed business. John and Marcia have savings of $10,000 and $20,000 equity in their home.
The Howards' plan is that Marcia would run the business and that John would pitch in the evenings and weekends. Later, as the business grew, both might be able to devote full time to this enterprise, and, ultimately, the Howards hope that their children might enter the business and take it over. Meanwhile, the Howards are looking for $20,000 per year in profit from the endeavor.
Both John and Marcia are hard workers and have a good reputation in the community. Marcia, however, tends to be very independent and has definite ideas about the right and wrong ways to do things. In fact, this has led to a few minor altercations with her current boss.
The Howards' credit is excellent, having borrowed money before to finance their home and their automobiles.
The Howards have made an estimate of what they will need in the way of start-up funds. With inventory, fixtures and rent on a suitable shop as the main expenditures, they estimate that a total of $100,000 would be required.
Marcia knows a former high school classmate who would be willing to join the Howards in a partnership. This woman has $20,000 ready to invest, although she knows little about the apparel business.
The Howards have also considered the possibility of forming a corporation. Their lawyer suggested that they could incorporate and either retain all of the stock for themselves or sell some of the shares to Marcia's friend or others in the community who might want to take a chance on the new business.
Please analyze the Howards' situation and recommend the best form of business organization for them. Indicate in detail the reasons for your choice.