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Used car business: S. Corporation or limited liability

Duke has been a successful used-car dealer for 25 years in the same location, operating as a proprietorship. In those 25 years, he has expanded his operation and become the largest independent car dealer in a city of 85,000 people. The few people in town can boast of a business reputation better than Duke's. As he says "I've always done business in a fair and honest fashion, and I've always tried to give my customers an honest deal. The public has responded well and last year the business revenue increased to an all-time high of $830,000."

As the business has grown, so have Dukes liabilities. On a given day, Duke will have cars worth from $350,000-$450,000 as inventory on the lot. "Twenty years ago, if I asked the bank for a line of credit of $200,000, they have tossed me out the front door. There is no question today's business is different."

DukeĆ¢??s only daughter recently married a garage mechanic who has worked in the area for the past three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very smart. "The kid sure knows how to fix a car, but that's as far as it goes," says Duke. "My last visit to the accountant, he suggested I consider incorporating. I guess he knows what he's talking about. That's all you hear today -- be a corporation. I guess he's right. But, to tell you the truth, I don't know."

Please post your references.

1.Should Duke incorporate or should he remain a proprietorship? Explain your answer.
2.Discuss five of the essential components of a business plan.
3.Explain the differences between an S. Corporation and a limited liability corporation.
4.Discuss the positive and negative aspects of purchasing a franchise.
5.Discuss the pros and cons of buying an existing business.
6.Would you recommend an S. Corporation or limited liability corporation for Duke? Explain your answer.
7.Define and discuss four of the eight archetypes for new business ventures.

Solution Preview

The materials I have here are just possible solutions/suggestions to the problem posted.

1. Should Duke incorporate or should he remain a proprietorship? Explain your answer.
It is imperative and good for the business if Duke will be incorporated. This will ensure the future operation of the business. In a corporation, decisions are made by a board of directors and not only by a single person (this solves Duke's concerns of the company going into the hands, according to him, of an inexperienced "garage mechanic" [his son-in-law].
The major reason of going into corporation is that Duke can expand the business further by attracting the best minds and resources to join the business.

2. Discuss five of the essential components of a business plan.
Basically, there are eight (8) essential components of a Business Plan and I will give focus on the last five components.
a. Executive summary
b. Executive or management bios
c. Company information
d. Competitive analysis concerns on why you differ from competition, and are superior to them in every way, therefore, this component answers the question of "What is NOVEL with the company".
e. Pricing strategies - This concerns on the basic charges, seasonal discounts, among others to realize profits.
f. Marketing strategy is more about how to sell your product or service. It determines what market segment will you target, and how to go there.
g. Operations concerns on the technical aspect of production. It answers the issue of "the step-by-step procedure of designing and creating the product, what equipment, raw materials, and technical know-how are required to come up with a quality product.
h. Financial projections - This involves estimations of cash flow to predict revenues and expenses. Not only for planning purposes, but also for important milestones to show benchmark progress and plus securing lines of credit and loans from the bank. It is necessary for any business to project for the next five years the following financial statement-Cash flow statement, Income statement, and Balance sheet.

3. Explain the differences between an S. Corporation and a limited liability corporation.

An S Corporation
An S Corporation (Small Business Corporation) is a business elected for S Corporation Status through the IRS. This status allows the taxation of the company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a corporate tax structure. In general, S corporations do not pay any federal income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.
Pros of S Corporation Status
No Corporate Tax: The biggest attraction of this business ownership is the tax advantages. The profits and losses of the business pass through to the corporation owner's personal income tax. Like a Limited Liability Company, the tax "pass through" allows you to avoid "double taxation".
Reduce Taxable Gains: Selling your business can be part of your retirement strategy. An S corporation could have reduced taxable gains when the business is sold.
Write off Start-up Losses: In the early years of starting a business, you will have many expenses and losses. These can be offset against your personal income. A regular corporation would have the losses locked within the company and not applied to your income.
Liability Protection: S corporations offer protection against liabilities. However, liability protection is not complete protection. You can be personal liable for your actions. As well as, many lenders are now requiring personal guarantees.

A Limited Liability Company

A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do ...

Solution Summary

Duke,a used car dealer, is in a dilemma whether to change the structure of his business from proprietorship or a corporation.
This solution also five of the essential components of a business plan, delineating an S. Corporation and a limited liability, a franchise, and a discussion of four of the eight archetypes for new business ventures.