Your team has been asked to help John Smith, a local plumbing supply store owner. The business has been growing steadily at 15-20% per year since he started it in his home a few years ago as a sole proprietorship. Last year he did $350,000 in total sales, mostly in the summer months, showing a profit of $42,000. He now rents office and storage space and has hired his 20 year old child, his only one, as his only paid employee on a part time basis in the summer. The child is currently in his second year at a university far from home. Mr. Smith works full time at the business, and his wife works with him occasionally, but neither take any wages. His wife does have another part time job, but it would not support them or even her alone. They just take cash out of the business when they need it. You have examined the business’s financial statements and all seems to be in order. He hopes his child will eventually take over the business, but this is not a sure thing, so knows that instead he eventually may want to sell it when he is ready to retire. He is also concerned that his wife would be able to be supported by the business in case anything happened to him either by its sale or by continual income from the business. A local electrical supply store owner has decided to sell his business for $500,000 and Mr. Smith thinks it would be great fit with his current business and would like to buy it. As an added benefit it includes a building he could move his business into and stop paying rent. Combining the businesses would require hiring a full time employee. The most Mr. Smith has been able to get a bank loan for is $350,000 to buy it, however. Mr. Smith is not sure that remaining a sole proprietorship is best and wants you to explain the other forms of business he could use and make a recommendation to him.
1. Write a letter to Mr. Smith briefly explaining in your own words (not copying the textbook) the benefits and shortcomings of a sole proprietorship, general and limited partnerships, S-corporations, and LLC’s. Make a recommendation to him as to which form he should choose (or stay a sole proprietorship) based on what he wants to do. Make any other recommended changes you believe might be beneficial to him.