Karen Cup and Dana Bag decide to combine their passion for tea with a new business called “Tea Time”. Karen will devote herself full-time to the operation of the business which will include service of food and tea, as well as the sale of tea and related products. Dana has another business which she operates, and will work at Tea Time on weekends only. Dana will contribute $4,000 to the start of the business; Karen will contribute only $1,000. They will rent a business location.
What forms of business organization should Karen and Dana consider? What are the advantages and disadvantages of each?
The three main types of business organization they should consider are general partnership, limited liability company and corporation. Both the partnership and the LLC will provide for a pass through tax, as will a Subchapter S Corporation, avoiding double taxation. The LLC and corporate forms will also provide limited liability. An LLC is probably best, as it has fewer requirements than a corporation. It will require filing of required documents with the associated filing fees. The women should consult with an attorney to draft an operating agreement that addresses the issues of differing labor and capital contributions.
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