Franco and Melanie start a new business called F&M Delivery. Franco contributes $50,000 in cash, and Melanie contributes a fleet of vans worth $80,000. The business assumes Melanie's $30,000 debt on the van. The business borrows $500,000 to purchase necessary buildings and for working capital. They anticipate that the business will suffer losses for at least three years before it becomes profitable. Which entity forms would be appropriate for Franco and Melanie's new business?

Question

What will be an ideal response?

Answer 1

The key nontax attribute that Franco and Melanie need is limited liability. The business is heavily financed by debt and the owner's personal assets need to be protected should the business not be successful. The entities that provide limited liability are corporations, S corporations, limited liability companies, and limited liability partnerships. A limited liability partnership will protect the owners for the general business debts of the business, but not for personal acts of the partners and is less desirable than the other entities. A limited partnership would not be appropriate because at least one of the partners will have unlimited liability for the debts of a limited partnership. Because they expect losses, a conduit entity would allow losses from the business to flow through to Franco and Melanie for deduction. Therefore, an S corporation or a limited liability company will be the entities that are most appropriate for the new business.