Bugs and Donald are two major movie stars. They both decide to use their fame to some good fortune. They want to create a new company that will help garner them additional income outside of being big-time movie stars. After brainstorming while vacationing in Palm Springs, they decide to create a clothing line. They want to sell clothes that feature their image on it. These clothes will range from shirts, socks, pants, hats and even underwear. They figure that because of their celebrity status they will be able to gain additional income. Bugs has a lot of money and is technically the bigger movie star. He is excited about helping out Donald but he’s afraid of Donald’s hair-brain ideas. Also, he’s concerned because he knows that Donald is a wild duck and may do something that can cause him to be liable. Bugs is not concerned with managing the day-to-day activities of the company, but wouldn’t mind making more money. Although, Donald is not as rich as Bugs, he’s interested in putting up just as much as Bugs to start off their business. Donald is not worried about liability of the company because he thinks he will run the company. He is concerned about having a lot of formalities to conducting business. He wants to be able to make decisions about the company without any problems. Also he’s not interested in having any other business partners/investors involved with this enterprise.
Bugs and Donald come to the firm to solicit your advice. Please answer the following questions in less than two double-spaced pages.
What type of business entity do you suggest that Bugs and Donald create? Be sure to address all of their concerns regarding liability, management and ownership. (25 pts)
After Bugs and Donald leaves your office, their neighbor (another lawyer) tells them that it would be easiest for Bugs to loan Donald the money and for Donald to run the company as a sole proprietorship.
If Donald listens to this idea what are the disadvantages of operating it as a sole proprietorship? What are the negatives for Bugs to merely loan the money to Donald as the neighbor suggests? (15 pts)