Right Type of Business Formation

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Wave -- Business Entity Type Discussion

Read the scenario set out below and discuss the questions that follow it:

Art Fleming is a design engineer with a proven track record in the field of electronic musical instruments. He recently designed a new VLSI (very large scale integrated) chip. This chip is meant to be the heart and soul of a digital sampling keyboard to be called WAVE. Fleming believes the WAVE will set a new industry standard. He wishes to organize a business enterprise to build and market it. He has a meeting with his lawyer and conveys to her the following bits of information:

It will take approximately 2 years to turn the VLSI chip into a marketable product

Given that is true he will have to live on something….whether it be the savings or something else. There obviously wouldn't be any WAVE revenue coming in. He's have to live on income from other ventures or his savings. Also, this would preclude him from doing S-Corp since even owners are paid W-2 wages. This would probably point to a C-Corp/LLC…but we shall continue.

b. Fleming has more than $200,000 in savings from previous ventures. He does not want any of that money to be at risk in this new venture.

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However, he wants part ownership. He is unsure what percentage he wants.

This also points to a corporation of some sort. Doing a partnership would be a possibility (with limited and full-on partners) but the money of the partners would basically be completely at risk in terms of liability and such. As noted before, an S-Corporation would not be possible (since he can't pay himself from the WAVE due to lack of revenue) so this would all also point to a C-Corp/LLC.

c. Currently, 5 investors are willing to put money into the venture. Only 2 of the 5 want to play an active role in the enterprise. Fleming is willing to give these 2 some limited control.

Another vote for C-Corp/LLC. The non-active people could buy stock and then "cash in" when they feel they've gotten their investment back. The two that want active control could be in management positions that can be decided between them but they would have to be paid if that is done.

d. Fleming knows that he is not qualified to manage the new endeavor. Nevertheless, he wants a significant say in how….....

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