Sheldon Rozean

P: (800) 555-1212
Sheldon.rozean@aggrowth.com

MEMORANDUM – Privileged & Confidential

TO: FRED & SALLY JONES

FROM: Sheldon Rozean

DATE: 03/15/2023

RE: FRED’S MIRACLE COUGH SYRUP

Business Entities
Sally and Fred, I would like to educate you on the different types of business organizations that
you can choose to have. Each has its own advantages and disadvantages that we will cover in this
memo. The first is a sole proprietorship, which is a business in which one person controls the
management and profits (Kubasek, 2017). The disadvantages of a sole proprietorship are that
you are personally liable for all losses, and funding is limited to your own personal funds and
loans. The advantages to this type of business are you have total control, it is easy to create, and
all profits are yours.
The second type of business entity is a partnership. A partnership is a voluntary association
between two or more people who co-own a business for profit (Kubasek, 2017). The advantages
are it is easy to create, the income is personal income, and losses can be deducted from your
taxes. The disadvantage of a partnership is that all partners are liable for all losses. This can also
be an advantage though, as your partner shares the burden, unlike a sole proprietorship.
There are general partnerships, limited partnerships, and limited liability partnerships (LLP).
Another type of partnership is a cooperative. A cooperative is an organization consisting of
individuals who join together to gain an advantage in the market that mutually benefits all
members (Kubasek, 2017). It can be incorporated or unincorporated. Another type of partnership
is a joint venture, which is a relationship between two or more persons or corporations that are
created for a specific business undertaking.
The third type of business entity is a corporation. A corporation is a legal entity formed by
issuing stock to investors, who then are the owners. The advantages of a corporation are profits
are taxed as income to the shareholders, not the partners, it is easy to raise capital by issuing
stock, and shareholders have limited liability. The disadvantages are corporate income is taxed
twice, and formalities are required in establishing and maintaining corporate form (Kubasek,
2017).
The fourth type of business entity is a limited liability company (LLC). An LLC is a separate
unincorporated business entity that is taxed like a partnership, with members paying personal
income taxes, but has the limited liability of a corporation (Kubasek, 2017). One advantage of an
LLC is that the IRS generally treats it like a partnership or sole proprietorship. No separate tax is
assessed on the company itself.
Product Liability
Based on the information you provided, product liability law will most likely be a factor. One of
the key ingredients in your cough syrup causes a severe reaction when taken with aspirin. This is
a serious liability of your company, and something we should discuss in depth before launching
the product. Is there a way to alter the original formula and change this ingredient to something
similar? Has there been any studies or research done on the ingredient that could help us find an
alternative? Without knowing the ingredient, we will assume it cannot change and that we must
stick to the original formula. Strict Product liability is liability under which courts may hold the
manufacturer, distributor, or retailer liable for any reasonably foreseeable injured party
(Kubasek, 2017). With this manufacturing defect, we must put a warning label on the front of
this product as a disclaimer. This will affect sales, as there are other cough syrups already on the
market that do not cause a severe reaction when taken with aspirin. With a warning label on the
bottle, we will not have a case of negligent failure to warn against the company.
Agency Relationship
The agreement between Fred and Sam is that Sam will start as an employee, with the option to
make Sam a partial partner down the road. Sam’s involvement before the business formation, as
well as his anticipated role once the business is formed, creates an agency relationship. An
agency is a fiduciary relationship that arises when one person consents to have another act on his
behalf and is subject to his control and the other consents to do so (Kubasek, 2017). The role
Sam will play in the business will be transported as well as marketing the product. Sam’s van
will be utilized to transport and make deliveries.
Real Property
The product is currently made in an outbuilding on the family farm. Fred, Sally, Sam, and his
sister Lilly, as well as Sam and Lilly’s’ spouses and children, all live on the property. Fred and
Sally live in the main house, while Fred and Lilly’s’ families have separate cabins in different
areas of the property. Zoning could come into play here, as it sounds as if the land is considered
residential or agricultural. If Fred wishes to use the land in a manner prohibited by zoning laws
we must seek permission, called a variance, from the zoning board or planning commission.

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Manufacturing requires a Formal Transfer of Ownership
Fred and Sally being married negate the need for a formal transfer of ownership, as the rights to
the property and everything on it goes to the surviving spouse and children. However, Fred
should make a will or trust to plan out his wishes for the property in the case of his passing.

Personal Property
One potential personal property issue with using Sam’s personal vehicle to deliver inventory is
reimbursement for wear and tear, insurance, and mileage. Fred could have the business lease
Sam’s truck under contract to reimburse Sam for his depreciation on the vehicle. The business
should also cover insurance costs, as this will be tax-deductible, as well as the lease costs the
business incurs.

Liability Issues
One liability issue that Fred could face is respondeat superior. This states that the owner of the
company is liable for the actions and harm caused by an employee. The principal/employer holds
vicarious liability which is liability given to the employer because they hired the agent/employee.
If Sam were to be involved in an accident while delivering the cough syrup, Fred would be held
liable as the owner of the company for any damages and negligence.

Estate Planning
An issue that could arise with estate planning is who gets the land and business if Fred dies. If
Fred would pass away suddenly, without a will or trust left behind, his estate would be
considered in intestate. This means the state would take control and issue real and personal
property to his surviving spouse and children, based on the laws in that state (Kubasek, 2017). I
would highly recommend Fred put together a will and clearly define what his wishes are for the
property and the business in case of any misfortune or illness. This way Fred can control how
much of the real property, the business, and personal property goes to each family member. A
general power of attorney is another option for Fred. He could give power of attorney to his wife
or his children depending on the situation so they could continue to make decisions for the
business and the estate if Fred’s health were to go south.
A trust is another option for Fred and his family. A trust allows a person to transfer property to
another person to benefit a third party. A trust usually has two parts, income and the trust corpus

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(Kubasek, 2017). Trust corpus is the property that Fred and Sally currently own. The income
would be the business income, or what is left of Fred’s retirement and savings.
Conclusion-Business Entity recommendation
The business entity that I would recommend to Fred for his Cough Syrup business is an LLC.
For tax purposes, this is the best choice for a small business like Fred’s. Another reason this is a
great choice is it is easy to create, costs nearly nothing to start up, and is easily manageable by
keeping track of receipts and setting up separate bank accounts for the business. Another benefit
is the LLC will be held liable for any negligence or loss, not Fred or his family.

References
Kubasek, N. K., Browne, M. N., Dhooge, L. J., Herron, D. J., & Barkacs, L. L. (2020). Dynamic
Business Law. McGraw-Hill Education.