Three (3) personal trainers at an upscale health spa/resort inSedona, Arizona, want to start a health club that specializes inhealth plans for people in the 50+ age range. The trainers DonnaRinaldi, Rich Evans, and Tammy Booth are convinced that they canprofitably operate their own club. They believe that the growingpopulation in this age range, combined with strong consumerinterest in the health benefits of physical activity, would supportthe new venture. In addition to many other decisions, they need todetermine the type of business organization that they want to form:incorporate as a corporation or form a partnership. Rich believesthere are more advantages to the corporate form than a partnership,but he has not convinced Donna and Tammy of this. The three (3)have come to you, a small-business consulting specialist, seekinginformation and advice regarding the appropriate choice offormation for their business. They are considering both thepartnership and corporation formation options.
Assume the trainers determine that forming a corporation isthe best option. Next, Donna, Rich, and Tammy need to decide onstrategies geared toward obtaining financing for renovation andequipment. They have a grasp of the difference between equitysecurities and debt securities, but do not understand the tax, netincome, and earnings per share consequences of equity versus debtfinancing on the future of their business. They have asked you, theCPA, for your opinion.
Provide a summary to the partners, outlining the advantagesand disadvantages of forming the business as a partnership and theadvantages and disadvantages of forming as a corporation. Recommendwhich option they should pursue. Justify your response.
Explain the major differences between equity and debtfinancing, and discuss the primary ways in which each would affectthe future of the partners' business.
