Question

Daphne and Simon want to start a business together making and selling cupcakes and other desserts. They want to name their company "Diamond of the Season Cupcakes." They are trying to decide whether to form:

a general partnership, a limited liability partnership, or a limited liability company. Their objectives are to form an entity with the best combination of the following features:

(1) ease of formation;
(2) limitation, to the extent possible, of personal liability for debts and other financial obligations of the business;
(3) favorable tax treatment; and
(4) flexibility in management of the business. In a brief memorandum (two-page maximum), make a recommendation to Daphne and Simon about which entity they should form and why. Your analysis should include a comparison of the advantages and disadvantages for each type of entity they are considering
(i.e., you should not discuss every type of entity covered in the assigned reading).

Answer 1

An LLC is recommended for 'Diamond of the Season Cupcakes' due to its liability protection, pass-through taxation benefits, and flexible management, which align with Daphne and Simon's business objectives.

Step-by-step explanation:

Daphne and Simon are considering three business structures for their company, “Diamond of the Season Cupcakes”: a general partnership, a limited liability partnership (LLP), and a limited liability company (LLC). To determine the best choice, they should evaluate each option in terms of ease of formation, personal liability limitation, tax benefits, and management flexibility.

A general partnership offers the ease of formation and allows for shared management but lacks in personal liability protection and the partnership can end if one partner leaves. An LLP provides liability protection to the extent of the investment and allows for shared control; however, it is less flexible than an LLC, which also offers complete liability protection and adds the advantages of favorable tax treatment as well as great management flexibility.

Considering their objectives, a limited liability company appears to be the optimal choice for Daphne and Simon. An LLC allows them to protect their personal assets, gain tax advantages through pass-through taxation, and maintain a flexible management structure. This business structure strikes the best balance between ease of formation, liability protection, tax treatment, and management control for their cupcake and dessert venture.