Mini Case 6-1: "Today, You Gotta' Be a Corporation

question 72

Essay

Mini Case 6-1: "Today, You Gotta' Be a Corporation"
Duke has been a successful used car dealer for 25 years in the same location, operating as a proprietorship. In those 25 years, he has expanded his operation and become the largest independent car dealer in a city of 85,000 people. Few people in town can boast of a business reputation better than Duke's. As he says, "I've always done business in a fair and honest fashion, and I've tried to give my customers an honest deal. The public has responded well, and last year the business revenue increased to an all-time high of $830,000."
As the business has grown, so have Duke's liabilities. On a given day, Duke will have cars worth from $350,000 to $450,000 as inventory on the lot. "Twenty years ago, if I'd asked the bank for a line of credit of $200,000, they'd have tossed me out the front door. There is no question that today business is different."
Duke's only daughter recently married a garage mechanic who has worked in the area for the past three years. Though Duke thinks the boy is certainly nice enough, he does not believe he is very smart. "The kid sure knows how to fix a car, but that's as far as it goes," says Duke. "On my last visit to the accountant, he suggested I consider incorporating. I guess he knows what he's talking about. That's all you hear today - 'you gotta be a corporation.' I guess he's right. But, to tell you the truth, I don't know."
-Should Duke incorporate or should he remain a proprietorship? Why?

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Definitions:

Investment

The act of allocating resources, usually money, with the expectation of generating an income or profit over time.

Acquisition Method

An accounting process used during the consolidation of financial statements that involves combining the buying and selling entities' assets and liabilities.

Consolidated Financial Statements

Financial documents that combine the accounting records of a parent company and its subsidiaries, presenting the financial position as if they were a single entity.

Equity Method

An accounting technique used to assess the profits earned by a company through its investment in another company, recognizing income or loss in proportion to its ownership share.