Corporate ownership is limited liability of shareholders

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Reference no: EM131729108

1. One major advantage of corporate ownership is limited liability of shareholders. Let's say that Emma is the primary shareholder of a family based corporation that owns five laundromats in town. Emma company needs to borrow $200,000 from the bank to expand its business. As President, she signs a promissory note with the bank on behalf of the corporation. The banker also asks that she another document in which she is personally liable for the loan in the even the corporation cannot repay it. The three other shareholders, Tom, James and Linda, do not sign the paper to be personally liable. If the company goes bankrupt and the bank loan is not paid, is Emma personally liable to the bank for the balance on the note or is she not liable since the loan was given to the corporation?

2. Are Tom, James and Linda personally liable for the balance of the $200,000 loan? If they have each invested $50,000 in the business, what is the most each of them can lose if the business goes into bankruptcy?

3. A very popular type of business ownership today is the limited liability company. Go online and find at least one article / site that discusses LLCs. Why is this type of business ownership so popular today? Why is it apparently more popular than, say, a Subchapter S corporation? Are there disadvantages to an LLC business?

4. Rachel and Tom Smith are a couple who live in Rainbow Falls, Iowa. The town movie theater is going to close down since the owners are retiring. Rachel and Tom want to buy it. They have many options - they could open the theater as a for profit company and try to show normal movies OR they could open the theater as a nonprofit organization and show either regular first run type movies or perhaps get into some of the classic movies or movies that are not in the popular stream. They might be able to enter into some sort of agreement with the city for a government business partnership (for community betterment).

Rainbow Falls is a town of about 9,000 people and is big enough to support a theater. The theater has done moderately well over the years and, in addition to showing movies, has a shop where people can rent DVD movies, too. In the past the theater has done well enough to pay expenses but not good enough to provide a living for the owners - at least not in the last few years since bigger towns close by have bigger and more modern theaters and because there are $1 theaters in the region. Obviously Red Box and Netflix as well as video on demand provides serious competition.

If Rachel and Tom run it as a business, it could be a sole proprietorship (since they would be filing a tax return as a married couple and would report the income or loss on Schedule C). Other options are available - partnership, limited partnership, LLC, S corp and so on. What type of business organization would you suggest for Rachel and Tom?

Reference no: EM131729108

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