Question

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of $550,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

1. What is the main advantage they gain by selecting a corporate form of business now?

Short answer

Answer

The main advantage they gain by selecting a corporate form of business is that it will be growth company that generates positive cash flows and reinvests it’s earnings for establishment of franchises rather than distributing it as a dividend.

Step-by-step solution

Corporation definition

A corporation is a legal entity that is separate and different from its stakeholders and promoters. Under the law, corporations possess many of the similar rights and responsibilities as an individual.

The main advantage

Growth company: For growing business they need to open new franchise in different states and the corporate form of the operation is the easiest way of controlling significant positive cash flows or earnings. For their own retained earnings, a growing company tends to have very profitable reinvestment opportunities.