Worksheet: Business Forms and Types Case Studies

AOF Principles of Accounting

Lesson 2Business Forms and Types

Student Resource 2.2

Worksheet: Business Forms and Types Case Studies

Student Names:______Date:______

Directions: Read the following case studies and determine the following: 1) businessform,2) rationale for business form, 3) at least two advantages and two disadvantages of the business form, and 4) business type. Also, state the essential characteristic of the business type. Use Student Resource 2.1 for reference.

Steve’s Skateboards and More, Inc.

Once you walk into Steve’s Skateboards and More, Inc., you feel like you’re in a whole new world. Not only does the store offer skateboards and gear for sale, but there’s also a ramp to try out the items before purchasing, a soda and snack bar in one corner, and clothes and accessories in another. One great thing about owning this business is that it has a small board of directors made up of a few successful businesspeople. So, whenever Steve has a question about improving sales or cutting costs, he can get top-notch advice. When it comes to paying taxes, though, the government takes a huge chunk of the profits, which sometimes makes Steve wonder whether he formed the right business form.

Business form:
Rationale:
Advantage: / Disadvantage:
Advantage: / Disadvantage:
Business type:

Mama’s Bike Rentals

Molly lives in a tourist town in which her mom has a business that rents bicycles. She makes a respectable income during most of the year because they live in sunny southern California. Since Molly’s mom worked for others in business prior to owning the bike rental shop, she has a good deal of the experience needs to succeed in running her own company. Recently, when one of the customers crashed on one of the rented bikes, he sued Molly’s mom, claiming that the brake system failed. Luckily, the insurance will cover much of the costs, but another accident like this one could put Molly’s mom out of business.

Business form:
Rationale:
Advantage: / Disadvantage:
Advantage: / Disadvantage:
Business type:

Sally’s Surf and Scuba

Sally grew up in Hawaii learning how to surf and scuba dive. She loves being in the water! In college, she met a guy named Bob who was born on the mainland and was eager to learn all that Hawaii had to offer. It wasn’t long before it seemed Bob was spending more time in the water than out. In teaching Bob how to surf and scuba dive, Sally found she had a real talent for instructing others. After college Sally and Bob joined forces and started a business together that fulfilled Sally’s dream of opening Sally’s Surf and Scuba. Because Sally had the idea for the business and has the knack for teaching, she’ll take the larger share of the profits, which means that Sally will also be responsible for more of the taxes and liability than Bob.Bob manages the shop and schedules appointments for surf or scuba lessons with Sally. He is concerned about getting sued personally if someone gets hurt scuba diving, but knowing the business has insurance gives him a little more peace of mind.

Business form:
Rationale:
Advantage: / Disadvantage:
Advantage: / Disadvantage:
Business type:

Latka’s Landscaping

In high school,Latka started a yard maintenance business for himself and made quite a bit of money. By the time he was a senior, though, his business had come to a halt; it was no longer growing. He knew he didn’t currently have the knowledge or expertise to expand his trade and at the same time believed himself capable of perhaps running a large corporate enterprise. So, he enrolled in a nearby college and majored in accounting. All through college, he continued to make enough money in his fledging yard maintenance business to help pay his tuition. When he graduated,Latka was ready to go big! He began by structuring his company so that he had some legal protection in case he or one of his future employees accidentally ruined someone else’s property, and he was careful to avoid double taxation. Within the year he’d written a business plan, obtained a small business loan, hired employees, purchased some more equipment, and begun to plan a countywide advertising campaign. He was on his way to creating, expanding, and running a major company.

Business form:
Rationale:
Advantage: / Disadvantage:
Advantage: / Disadvantage:
Business type:

Pod Squad

By the time they were seniors in high school, Charlie and Chad had taken a few business courses from the Academy of Finance. They felt confident that they could be successful businessmen if only they could figure out a way to finance their dream company, the Pod Squad. The mobile Pod Squad would sell cell phones, iPods, and iPhones from the back of a van, which Charlie already owned. The Pod Squad would specialize in the convenience market; customers could call the Pod Squad and have the selection of products brought to their homes, rather than having to go somewhere for their purchase. They brought up their idea and their financing dilemma to the accounting teacher, who suggested that they write up a business plan. She told them she’d be happy to go with them to present the plan to Mr. Moola, a banker who was on the National Academy Advisory Board. The next thing you know, Charlie and Chad were in business! Although completely liable for their professional conduct, they have few other government regulations restricting their business. They get along really well and can’t imagine ever not working together, which is good since it might be tough to find a buyer for one person’s share of the business. Fortunately, they also do not have to pay separate income taxes on Pod Squad income. They will share the profits 50/50 and pay taxes personally.

Business form:
Rationale:
Advantage: / Disadvantage:
Advantage: / Disadvantage:
Business type:

Polly’s Potions

After graduating from college with a master’s degree in chemistry, Polly wasn’t sure where to begin her career. For the last two years, she had worked as an intern for a worldwide perfume company that wanted to hire her full time. She liked working there, and had made many good contacts, but she wanted to try working for herself. So Polly decided to try producing perfume on her own in a home lab that she’d been experimenting in when she had free time. The perfume she liked to make was all organically based from a variety of flowers, herbs, and spices. Due to the nature of the perfume industry, she believed she needed the utmost legal protection, so she formed the appropriate business entity.She asked her college friend, who became a lawyer, to complete the required state application for the business. Polly isn’t concerned about the secrecy of her formula or nonparticipating owners since she plans to be the only owner.Polly likes the idea of this business form because it protects her personally from being sued by an unhappy customer, plus it has the benefit of taxation of company earnings at the personal level.

Business form:
Rationale:
Advantage: / Disadvantage:
Advantage: / Disadvantage:
Business type:

U.S. Steel Bought the First Billion-Dollar Business

AndrewCarnegie of the Carnegie Steel Company is known as the multimillionaire steel magnateof the Gilded Age of the late 1800s and for building one of the most powerful businesses in history. Carnegie’s steel company produced steel rails in the midst of a depression. None of his customers, who were the railroad companies, had the money to purchase the rails at the current cost. So Carnegie lowered the prices to a level that they could afford. In this way, he undercut the market. He believed that although he’d lose money in the short term, he’d win customers and contracts and earn more money in the long term. Many of Carnegie’s competitors were forced out of business because they couldn’t afford to match his prices. History has shown thatCarnegie made the right decision to think in the long term. When Carnegie sold out to U.S. Steel in 1901, his company was valued at more than $1 billion. Today, U.S. Steel employs more than 50,000 people and is listed on the New York Stock Exchange. Investors can buy shares of ownership in U.S. Steel, and receive dividends if the company pays them. This enables the company to raise a large amount of money for expansion. However, being publicly owned gives competitors access to company information.

Business form:
Rationale:
Advantage: / Disadvantage:
Advantage: / Disadvantage:
Business type: