Heather and Manny have decided to open a bakery together. They are experienced bakers who specialize in scones, and they feel the world is in need of moist and delicious scones. They are concerned about protecting their assets in case the business fails, but also about being able to pay the taxes for a business that is just starting out. What are the pros and cons of the different business entities they could form? Which type of business entity do you think would be their best option and why?
Heather and Manny open their business and find a sugar supplier, Sweet Myron, Inc. Their relationship with Sweet Myron, Inc. is great at first; the sugar is of good quality and is delivered according to their contract. However, after a few months, Sweet Myron, Inc. starts providing deliveries later and later and is eventually unable to deliver any sugar at all. Unfortunately, Heather and Manny have already paid Sweet Myron, Inc. for the sugar that has not been delivered.
Sweet Myron, Inc. is incorporated with Byron Myron and his wife are the sole shareholders and the directors and officers of the corporation. Byron and his wife have held two annual meetings over the last eight years and do not keep current minutes for the corporation. Sweet Myron, Inc.’s bank account rarely has a positive balance and most of the corporation’s expenses are paid from Byron and his wife’s personal account.
Heather and Manny file a lawsuit for breach of contract against Sweet Myron, Inc., and against Byron Myron and his wife as individuals. Do you think Heather and Manny will be successful holding Byron Myron and his wife personally liable? Why or why not?
Heather and Manny seem to have no end of back luck. Rhonda’s Radical Tea Shop is their biggest client. Heather and Manny have a contract with Rhonda’s Radical Tea Shop to provide scones weekly. Rhonda is the only owner of Rhonda’s Radical Tea Shop and Rhonda has not filed any business formation paperwork with the Secretary of State.
Unfortunately, it’s been six months, and Rhonda’s Radical Tea Shop has had no money to pay its scone bill. Heather and Manny sue Rhonda, but Rhonda claims she is not personally liable and they can only sue the business because the contract is with Rhonda’s Radical Tea Shop. Is Rhonda correct?
All of this unfortunate litigation has taken its toll, the debts are piling up, and Heather and Manny’s business is struggling to provide the world with moist and delicious scones. Heather and Manny are planning to have their business file for bankruptcy, but which chapter should they file under? What would be the pros and cons of each chapter they could file under?