Mimis Cupcakes Business: Case Study Analysis

Case Study Analysis: Mimi’s Cupcakes Business

Most companies dominating the various industries around the world started as mere business ideas, which were implemented through the formation of sole proprietorship startups. Their flourishing led to their incorporation into limited companies; today, they are cherished businesses. That is the same trend and future that Mimi’s Cupcakes Business is aspiring for; hence, the progress towards incorporating the industry is long overdue. Although Mimi fears the outcome of the incorporation, especially concerning assets and taxation, there is less to worry about.

Mimi’s worries revolve around two key aspects. Firstly, Mimi is already of advanced age, and her life expectancy is approximately two years from the scheduled date of starting the business. She has been serving as the owner and the CEO of the startup. Her frequent visits to her cardiologist suggest she has a few years to live. The critical problem is the succession now that her health is deteriorating; at some point, she will be unable to manage the business as usual. She is yet to come to terms with the idea that she will pass her position over to another person. Secondly, it is apparent that tax obligations tied to the businesses that are formally incorporated pose another challenge that her industry is facing. In one of her visits to the cardiologist, she learns that the clinic has been incorporated into a limited company. However, the cardiologist cites that he just retained the land and the building on which the business is situated. In brief, he did not incorporate the two. He, however, fails to tell the owner the reasons that informed his actions. Before incorporating her cupcake business, she needs thorough information about what she is unsure of.

A limited company and a sole proprietorship have different ownership and management styles defined by the company law. As for Mimi’s Cupcakes Business, Mimi is both the owner and the manager. It is legally acceptable now that it is yet to be made a company. Once incorporated, business owners become the shareholders. They automatically lose their stature as managers. Companies law requires newly founded shareholders to elect representatives/ directors to manage the company’s affairs. For small enterprises, the owners might become the directors. If many shareholders come on board, a few directors are elected. The principle of permanent existence or perpetual succession stipulates that the death or insolvency of a shareholder cannot stop the business’s operations (Agrawal, 2016). This is unlike in sole proprietorship, where the death or incapacitation of the owner could lead to the collapse of the business. For example, if Mimi became unable to move or the unfortunate event of her death occurred, Mimi’s Cupcakes Business could collapse and cease in the long term.

As for Mimi’s Cupcakes Business, she is incorporating the enterprise means that its ownership will be distributed among a few shareholders. Mimi’s health is deteriorating. Once included, she will no longer need to retain her business owner and manager position. The enterprise must have a few directors with three shareholders who have already been identified. The directors, through a majority, can vote on who to become the manager/CEO. This way, Mimi will be relieved of managing the enterprise now that her health has worsened.

Incorporating certain assets is a critical dilemma in many businesses, often due to tax obligations. In the USA, IRS classifies assets concerning depreciation. Land and buildings are not subject to depreciation (Murray, 2018). Hence, no depreciation amounts are set aside for them in any accounting period. The company’s law in the USA holds that the two assets appreciate. When owned by individuals, the value added is not subject to taxation. If they are properties of a company, appreciation is interpreted as capital gain, and it is subject to taxation on an annual basis (Youngman, 1996). If a company decides to sell its land or building, it incurs another capital transfer tax. These taxes are often absent in case individuals own the land and buildings. This is explained by the clinic’s owner’s decision not to incorporate the land and the buildings on which his clinic was situated—as for Mimi’s Cupcakes Business, which is still trying to penetrate the market, failing to incorporate buildings and land is a crucial cost-saving strategy.

From the previously mentioned case study analysis, it is manifest that what Mimi is facing is troubling, especially now that there is little information about what happens when an enterprise is incorporated. She plans to incorporate the business and sell shares to three people while she retains the majority shareholding. Now that her health is failing, it is in her best interest to surrender her management position to another person. It is very unwise to have the business’ building and land incorporated. The two assets will start incurring tax immediately. That will be an added cost that can be easily avoided now that the business is attempting to minimize costs and maximize returns to stay afloat.

References

Agrawal, M. (2016). 10 principal features of an incorporated company. Your Article Library. Retrieved from http://www.yourarticlelibrary.com/company/features-company/10-principal-features-of-an-incorporated-company/75890

Murray, J. (2011). 10 facts you should know about business assets. The Balance. Retrieved from https://www.thebalancesmb.com/business-assets-facts-397849

Youngman, J. M. (1996). Tax on land and buildings. Tax Law Design and Drafting, 1, 1-27. Retrieved from https://www.imf.org/external/pubs/nft/1998/tlaw/eng/ch9.pdf