Title: Credit Unit 3 Answer Key
Course: SkillsCom BA 260 15.0 > Section: END of Credit Unit 3

Case 1

What type of bankruptcy agreement would you recommend? Why?

Recommend Chapter 13 bankruptcy. Chapter 13 would allow Debbie to reorganize her debt structure with the least amount of harm to her credit rating.

2.     Why would you not recommend the other types of bankruptcy? Be complete in your answer.

Chapter 7 requires liquidation of the business. Debbie feels that the business can survive if given one more year. Chapter 11 is reorganization and this is not necessary. Since Debbie feels the business can pay all of its bills eventually, Chapter 11 will only serve to harm Debbie’s credit rating.

3.     When selling the creditors on your recommendation, what arguments would you use?

In selling Debbie’s creditors on Chapter 13, the main argument is Debbie’s suggestion that giving her more time is the only situation in which everyone can win. But her creditors only see a failing business with their money being lost. For her to get them to accept this she needs convincing facts on sales and why this will turn a profit. She needs this not only for her creditors, but for her own decisions. A feeling that the business will succeed is not enough. Continuing with a losing proposition will only show arrogance and poor judgment.

Case 2

1.     What are the advantages and disadvantages of a partnership?

Advantages of Partnerships

·         Ease of formation

·         Direct rewards

·         Growth and performance facilitated

·         Flexibility

·         Relative freedom from governmental control and regulation

·         Possible tax advantage

Disadvantages of Partnerships

·         Unlimited liability of at least one partnership

·         Lack of continuity

·         Relative difficulty obtaining large sums of capital

·         Bound by the acts of just one partner

·         Difficulty of disposing of partnership interest.

Advantages of Corporations

·         Limited liability

·         Transfer of ownership

·         Unlimited life

·         Relative ease of securing capital in large amounts

·         Increased ability and expertise

Disadvantages of Corporations

·         Activity restrictions

·         Lack of representation

·         Regulation

·         Organizing expenses

·         Double taxation

2.     Provide your opinion on whether the Harlows should incorporate.

The advice from their accountant is correct. The Harlows should incorporate for the purposes of limited liability and the access to capital through the issuance of stock.

Their continued growth and success with their motels has them in a position that the corporate form of organization is their best option.

3.     Would the LLC option be a value to them? Explain.

Yes, the limited liability company (LLC) is a hybrid form of business enterprise that offers the limited liability of a corporation but the tax advantages of a partnership. A major advantage of the LLC is that it does not pay taxes on an entity; rather, profits are “passed through” the LLC and paid personally by company members. Another advantage is that the liability of members is limited to the amount of their investments.

In an LLC, members are allowed to participate fully in management activities, and, under at least one state’s statute, the firm’s managers need not even be LLC members. Yet another advantage is that corporations and partnership, as well as foreign investors, can be LLC members. Also, no limit exists on the number of LLC shareholder  members.

Case 3

1.        A patent would not be useful in Tom’s case. Even though it is commonplace in this industry to seek a patent, Tom’s resources probably aren’t good enough to fight court battles. In addition, he makes the point that it will take the competition four years to catch up with him. At that time he hopes to have made further improvements which would make a patent meaningless.

Tom will need three years in order to attain a patent. If a competitor meets or exceeds his invention during this time, Tom will have wasted his time and effort. Also, Tom will need the resources to fight possible court battles. He doesn’t seem to be in the position to do this.

3.                  What do you think Tom should do? Why?

Tom should implement his new technology in whatever way is most beneficial to himself. He can sell his technology to an industry leader for money and possible employment. Or, he can begin his own business. After he is established, he will then be in a position to make improvements and seek patents.