Business Formation Advice Report

This legal report offers advice to Mr. and Mrs. Smith on forming their cough remedy business. It compares various business structures (sole proprietorship, partnership, Sub-S corporation, LLC, and corporation), highlighting the advantages and disadvantages of each concerning asset protection and tax implications. The report strongly recommends a Sub-S corporation for its asset protection and tax efficiency. It also addresses product liability concerns related to the cough remedy, emphasizing the importance of FDA approval and avoiding potential negligence lawsuits. The report further advises on hiring an agent, organizing family roles within the business, transferring assets to the corporation, complying with zoning laws, and handling employee/subcontractor arrangements for distribution. Finally, it suggests considering rights of first refusal for the family's land and emphasizes the importance of thorough research and planning before launching the business.

Axsom and Axsom, PA
555 69th Avenue, St. Petersburg, FL 33706
November 14, 2016
Mr. and Mrs. Fredrick Smith
29 Barkview Lane, St. Petersburg, FL 33715
Dear Mr. & Mrs. Smith:
Congratulations on your decision to market your cough remedy. Here are some guidelines I feel
you might want to consider to protect your assets to creating your business venture. I will
outline important key issues as a preliminary start to making things good as smooth as possible
so you can concentrate on making a profitable business for you and your family.
 You want to think about the type of business company structure you would like to set up.
I feel you would be better off, tax-wise, to incorporate your business so that you can
protect your assets. If you decide to set up as a sole proprietor, you are exposing your
personal assets and will have to pay more in taxes. The formation is easy and managing
the business is easy but you set yourself up for losses and liabilities if sued. If you set up
as a corporation and I suggest a Sub-S Corporation, you will receive a K-1 Schedule at
the end of the year. This schedule will show your losses or profits and will pass through
to your personal tax return. The company itself will not have to pay taxes but will have
to pay property taxes on any equipment and inventory it may have at the end of the year.
The other type of company you could consider is a Partnership which is a voluntary
association between two or more people who co-own a business for profit. The
formation is easy. The partners, each considered an agent of the partnership, are generally
not required to create an official or even a written agreement to establish it. Another
advantage to this type of structure is in most cases the partnership is not considered a
separate legal entity, income from the business is taxed as individual income for each
partner. For that reason, partners can also deduct business losses from their taxable
income. The disadvantage for a Partnership is the other partner is liable for each partner.
In this case, you and your wife are married so I don’t feel a partnership would be the best
business set up. Another type of business is a Corporation. These business setups have
shareholders. The business itself can be sued but not the shareholders. The downside to
this type of setup is the double taxation. The is one other type of corporation you might
want to examine. It’s called the Limited Liability Corporation (LLC). This type of
structure is similar to the Sub S Corp. but one difference is that the S corporation’s

existence is perpetual, but some states require LLCs to list a dissolution date in the
formation documents. Certain events, such as death or withdrawal
of a member, can cause the LLC to dissolve. In addition, the transfer of stock is freely
transferable with a Sub S Corp. and is not with the LLC. With the LLC, you would have
to get member interest to agree on any transfer of stock. Again, I feel your best setup, for
now, would be the Sub-S Corporation. That way, you can protect your assets and pay
less taxes. If you start to grow, you could form a Corporation so you can raise more
capital. A Corporation has more than 100 shareholders. A Sub-S Corporation has less
than 100 shareholders.
 You might want to consider researching an ingredient that isn’t allergic to aspirin as
aspirin is a well-known over the counter medication. The is a huge issue with product
liability here with this type of product. You will want to get your medication approved
by the FDA. If it is not approved, you sell it and someone becomes ill or dies, you could
be sued. Since you are aware that it could be allergic to aspirin and someone has a
terrible reaction to your cough medicine, you could be sued personally. I know the
business structure is set up to protect you but if you knowingly sell a product that could
be dangerous, that is considered negligence by law. Is your product approved by the
Homeopathic Association? You might want to consider either changing the name to a
more “natural” remedy than a “miracle” remedy for the public’s sake and for advertising.
 You will need to hire an agent to act as your representative should and when you need
one. Since you are setting up a company to sell an over the counter medication, I would
highly recommend retaining an agent. Most states require that you have one. An agent is
usually retained by a company to represent you such as an attorney who is also called a
fiduciary. What will be your role as the entrepreneur of this type of company? You
should sit down with your family, discuss who will be management, who will oversee
financials and run the day to day operations. This is called the organization of a business
structure. It is very important to have and create By-Laws so that you can protect
yourselves and each other.
 You want to identify the real property you will use for your manufacture. I understand
your son will help with deliveries of the products and is researching national chains for
distribution. When you incorporate your business, you need to set up a list of your
contribution (also known as capital) that you will be using for your facility. You would
need to transfer these items to your new business.
 As far as your land, farm and other real estate, you need to determine what you will
maintain for personal and professional use. The IRS states you can write off a certain

percentage of your expenses if you use your home (for example) for your business. Say
you have an office; you could expense a certain percentage of your utilities since you use
it for your business. You would have to keep separate records for the corporation and
your personal. You could transfer the farm property to the business as paid in capital as
well. It is very important that you legally transfer any title to your farm to the
corporation or stipulate any requests that you may have as far as your property rights.
You will also need to know your local zoning and ordinance laws as well. We would
need to contact the zoning department in your jurisdiction to see if there are any
restrictions. We would want to determine the interests in real property. Should there be
any easements, future interests and will there be any leaseholds? I would advise that if
there aren’t any issues with having a business on your land that you possibly lease the
property to the new business. Of course we would need to evaluate the tax value versus
out right transferring the deed to the company to make sure you make the right decisions.
 If your son uses his van to distribute products, you might retain him as a subcontractor
for a while and give him a tax form called a 1099. You would pay him but he would be
responsible for his own taxes. He, in turn, could write off the mileage and/or
maintenance on his van that he incurs to help offset the tax burden. As the company
grows, you could hire a company willing to distribute the product or purchase more
vehicles through the growing of your business. But first, I would recommend your son
being an outside entity. If your son chooses to do this route, he would want to examine is
auto insurance to make sure he has adequate coverage as well. If you should hire your
son as an employee, you would want to make sure you transfer any vehicle titles to the
business so that you would have adequate protection. You could hire him as a delivery
person through the company. Again, you want to make sure you have enough auto
insurance protection for the deliveries.
 In setting up your company, you might want to consider Rights of First Refusal when it
comes to your operating agreements with your land. You would want to keep the land in
your family. There are several agreements that can be created to protect your farm and
family estate.
In conclusion, I recommend the Sub-S corporation for your type of business. Some of the main
reasons is for protection of your personal property, income taxes, and the fact that you can
transfer stock more easily than an LLC. I feel we should start by doing our research with the
zoning and compliance departments, organizing duties from within your family members, listing
assets and real property to be used by the company and future intentions of your business.

Respectfully yours,
Jennifer Axsom
Axsom and Axsom, PA