In January 2010, Tony, Mike, and Sam planned to form a company to sell books to the public and to contract with people to read books to the elderly. Tony and Mike each invested $80,000. Sam pledged $55,000, but did not invest the money—instead promising to invest it later and work extra hard. In May 2010, they began operating. The business took a $120,000 loan at 11% from Razorback, LLC, a venture capital firm. Shawn and Bryan cosigned for the loan. The bookstore purchased merchandise from Custom Books pursuant to an output contract. The bookstore purchased merchandise from publisher Random House to stock their store and loan books to readers to the elderly.
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The business performed well until December 2010. First, Tony and Mike began to notice Sam behaving oddly. He would sometimes not show up for work and Shawn heard he was working at another store, Boone’s Books. Second, one of the people with whom they contracted to read started stealing money from customers. The reader, Jim, eventually conned customers out of $150,000. Third, Custom Books, which had been producing 20 books per month, ironed out some production problems and began producing 75-100 books per month. Finally, after 6 more months, Sam wanted to leave the business, maybe for Boone’s Books. He had not contributed any money to the business.
1. What business organization would you have chosen for the guys in January 2010 and why? Prepare the necessary forms to file.
2. What type of contractual relationship should the firm have with its readers and why? Who did the customers sue for the return of their money and why? Who will have to pay what and why?
3. Describe the contractual relationship with Custom Books and the duties each party has? Provide a list of the provisions you would like the business to put in any contract with Custom Books and explain why.
4. In January 2011, the guys decide they want to end their business venture with Sam and then Tony and Mike will form another business or continue on in this business without Sam. Is this possible? Describe the process and what will have to happen given the business form they are using. Assume Sam is not happy with Tony and Mike. What kind of agreement will Tony, Mike, and Sam have to sign and what should it cover and will any money change hands and how much and why?
5. What business type should Tony and Mike form for their new venture and why? Does this differ from the initial recommendation?
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