Assignment 1: Business Formation
Due Week 8 and worth 200 points
Three (3) personal trainers at an upscale health spa / resort in Sedona,
Arizona, want to start a health club that specializes in health plans for people
in the 50 age range. The trainers Donna Rinaldi, Rich Evans, and Tammy Booth
are convinced that they can profitably operate their own club. They believe that
the growing population in this age range, combined with strong consumer interest
in the health benefits of physical activity, would support the new venture. In
addition to many other decisions, they need to determine the type of business
organization that they want to form: incorporate as a corporation or form a
partnership. Rich believes there are more advantages to the corporate form than
a partnership, but he has not convinced Donna and Tammy of this. The three (3)
have come to you, a small-business consulting specialist, seeking information
and advice regarding the appropriate choice of formation for their business.
They are considering both the partnership and corporation formation options.
Assume the trainers determine that forming a corporation is the best option.
As a result, in exchange for their co-owned building ($200,000 fair value) and
$150,000 total cash that they contributed to the business, each of the three (3)
investors received 20,000 shares of $2 per common stock on August 15, 2013.
Next, Donna, Rich, and Tammy need to decide on strategies geared toward
obtaining financing for renovation and equipment. They have a grasp of the
difference between equity securities and debt securities, but do not understand
the tax, net income, and earnings per share consequences of equity versus debt
financing on the future of their business. The goal is to raise $1,400,000. Rich
proposes issuing shares of common stock in order to raise the $1,4M needed.
Donna and Tammy propose issuing debt.