Reference no: EM133411316

The Burnout Cycle

Your colleague Felipe has decided to embark on a new business venture. Felipe is currently employed as an accountant and has an income significantly in excess of $300,000. He owns a $1,500,000 house in San Diego and has interests in many local real estate investments. Felipe's business idea is that he believes he has cracked the code on "burnout." Burnout is an industry crippling phenomenon where accountants work incredibly hard in the weeks and months prior to tax filing deadlines, which occur approximately twice a year. Accountants who experience burnout suffer from depression, anxiety, and report lack of motivation. These burnout periods reduce productivity during periods when accountants could be getting a jumpstart on the next deadline. Instead, due to the lack of motivation, the next deadline is even more challenging and taxing on the accountant (pun intended). The "burnout cycle," as it is called, has caused an exodus of young accountants from the profession. Felipe has developed a proprietary video series and manual that directly addresses this phenomenon and he wants to market it as a cure. He is willing to invest $100,000 in this business idea.

While Felipe has identified a value proposition, he believes execution of the idea requires First Class video production, graphic design, and marketing. He is referred by a friend to Diana, who he has never met. Diana has designed books and video in the personal growth genre for 15 years. She has earned many awards for her work, yet despite great success she has few assets to show for it. She has nominal savings and no other assets. Diana pitches a basic theme/design for Felipe's product that he thinks is perfect. However, to pay Diana for doing the work, Felipe would exhaust $90,000 of his investment capital. Felipe proposes to Diana that they go into business together, and her sweat equity would be her capital contribution to the business. Diana is intrigued, but she is weary of being taken advantage of by Felipe. In their discussions, it is critical to both that they have managerial control of decisions.

Diana also mentions that her friend Patrice, who is a wealthy angel investor and former accountant with a personal net worth of over $50 million, loves Felipe's idea. In subsequent meetings between the three, Patrice commits $250,000 of capital toward the business. Patrice is an "angel" investor, but a real demon when it comes to negotiations. She wants an additional 10% of profits given her risk. Patrice, however, does not want to actively manage the business. This is acceptable to Diana and Felipe.

1. Discuss the significance of the concepts of unlimited liability and limited liability (in the context of business organizations).

2. Compare and contrast the significance or incentives for limiting liability as it relates to Felipe, Diana, and Patrice.

3. What is the optimal form of the proposed business? Address how the form you have selected implicates formalities required, management structure, tax, and the liability considerations you identified above.

4. How is Patrice's additional 10% addressed?

5. Based on the business form you have selected discuss the fiduciary duties, if any, owed by Felipe, Diana, and Patrice to each othe.

6. It's now ten years later. While the business was profitable for years 3-5, the rise of artificial intelligence has simplified accounting practices and mostly solved the "burnout cycle" problem. The business has been losing money for the past five years despite Felipe making a personal loan to the business of $50,000 to rebrand and update the product. The business has $100,000 in third party debt obligations and $500,000 in cash and saleable assets (including initial capital contributions). Felipe, Diana, and Patrice decide its time to end the business. What is that process and how will it unfold? Be clear about how creditors are dealt with.