Several years ago, Wanda went to the local animal shelter looking for a new dog, and when she arrived, the most pathetic looking bulldog-boxer mix she had ever encountered greeted her. The puppy had terrible skin problems, had lost almost all of his fur and his skin was pink from scratching. The poor thing looked like a naked mole rat, but Wanda fell in love with him at first sight. She didn’t look any further than that first kennel and promptly filled out the paperwork, named him Cosmo and took him to the vet. Her vet was cautiously optimistic about Cosmo’s prospects for recovery but advised Wanda that in addition to medication, Wanda would have to be very careful about what she fed Cosmo. As a result, Wanda began to research dog food and was horrified at the low quality of the foods and treats available. She began to research healthier alternatives and after some experimentation, developed several recipes for treats that Cosmo could eat without any ill side effects. As her friends watched the evolution of Cosmo from sickly pup to happy dog, they began to ask Wanda to bake those treats for their dogs as well. Soon, friends of friends were calling her for treats and before she knew it, Wanda was in the gourmet dog treat business. As a result of this blossoming interest in what she was doing, Wanda has been successfully baking and selling dog treats out of her home for the past several years, using the product name of “Salty Pawz.” The demand for her custom dog treats has grown to the point that she has a couple of friends who help her on a regular basis. Several months ago, she began selling her treats on Etsy.com. Since then, her online orders have started to outpace her capacity. This month, her brother-in-law set up a website for Salty Pawz and at first was excited that more people would have access to her products, but did not anticipate how many orders it would generate. She has been talking to entrepreneurs in her hometown to get advice about taking her operation “to the next level.” She has questions and concerns about almost every aspect of business – finances, legal structure, marketing, production and overall strategy: Does she even want to grow Salty Pawz further? And if so, how would she grow it successfully? ● The business was established in 2010 as a sole proprietorship. Wanda has been claiming all of the income and expenses for her business on a Schedule C of her personal income tax return. She uses a CPA to prepare her taxes, but maintains the day-to-day bookkeeping herself. Salty Pawz has shown a profit since 2011.
Salty Pawz currently operates out of Wanda’s home in North Carolina, and has had her kitchen certified by the local health department as a commercial kitchen.
She does not currently need a business license because all of her product is shipped and she has no customers coming to her home. ● Salty Pawz does have a Federal Employer Identification number for tax withholding purposes, a NC Sales Tax identification number and is registered with the NC Employment Security Commission for the purposes of reporting NC Unemployment Insurance Tax.
Two of Wanda’s friends help her on a part-time basis, primarily at night and on weekends after their regular jobs. She pays them in dog treats and is not currently paying salaries or wages.
Wanda’s brother-in-law manages her website, posting information about her products and keeping the information on the company current. He doesn’t charge her anything, but she feels badly asking him to do too much work for “free.”
Wanda spends most nights answering emails and inquiries through Etsy and her website while her friends bake and package the treats. She is working 15-hour days, 7 days a week and knows she can’t keep this pace up much longer. She is very reluctant to change how she is doing business because she doesn’t want to give up on the success she has built.
She is using the local “Pack & Ship” to get her dog treats to her customers, but sometimes she finds herself running to Pack & Ship more than once a day. She is trying to figure out a better way to handle shipping but hasn’t made any decisions about what would be best.
Wanda is concerned that if she grows the business, she may take on more financial and personal responsibility than she is comfortable with.
Prepare a summary showing Wanda the legal forms of ownership she could adopt for Salty Pawz as she expands the business. For each form of ownership, you need to provide the advantages and disadvantages of each legal ownership option specific to Wanda’s businesses.
After having explored the advantages and disadvantages of each form of ownership, which form of ownership would you recommend for Wanda and Salty Pawz, and why?
Lastly, if Wanda decides she wants the two friends she works with to become more formally involved in ownership of the business, does that change the advice you gave her in part (b) above and if so, how? If it does not affect your advice to her, then why not?