Jin is an accountant. Nuankae is a sous chef at a successfulSpanish restaurant on E. 68th Street, called “Que Lastima.” Jin andNuankae (who likes to be called “Kae”) both enjoy Louisiana cuisineand met at a cooking class. They decide to open a small restauranton W. 68th Street, called “Kae-Jin Cookin.’”
Jin and Kae meet with you to seek advice on how to establishtheir business. They do not expect to earn a profit in the firstyear or two of operation. Their principal expenses will be rent,salaries and food purchases. They expect to require about $200,000to cover expenses over income for the first year of operation. Jinhas $100,000 available; Kae $50,000. They can make up the $50,000shortfall either through a bank loan or from Kae’s uncle, “Dutch,”a retired wine importer. Dutch is willing to provide these funds aseither a loan or investment. Jin believes that the bank which iswilling to make the loan may require personal guarantees from Jinand Kae.
Kae plans to quit her job at Que Lastima and can devote 100% ofher time to managing the restaurant. Jin wants to continue workingas an accountant but is willing to handle the restaurant’sfinancial affairs and offer recipes.
Jin and Kae and ask you how they should proceed. Write a shortmemorandum addressing the following:
Under what form of business do you suggest they operate?
What steps should they take to create such an entity?
How should they obtain the funding necessary for their first yearof operation?
How should they manage the business?
Outline the principal terms of an agreement that reflects theintentions of Jin, Kae, and any other participants or investors, onthe issues of ownership, management, compensation, sharing ofprofits and losses, dissociation and buy-out.
Essay Question (30 points)
You are tasked with conducting an audit of the business of“Kae-Jin Cookin” after its first year of operation. You discoverthe following:
A file containing letters from Overpriced Properties, LLC, therestaurant’s landlord, seeking a fifty percent increase in rent fornext year. You ask Kae about this and she tells you she thinks shecan negotiate a new lease for only a twenty-five percent increasesince she is a ten percent owner of Overpriced Properties, LLC. Youask Jin about this and he tells you he did not know about Kae’sownership in Overpriced Properties, LLC.
Jin has made transfers of “Kae-Jin Cookin” funds to a companycalled “X Factor LLC.” You ask Jin about this and he tells youthese were short term loans to a sports fitness business in whichhe has invested and that all amounts will be repaid shortly. Youlearn from Kae that she knows nothing about these loans.
A file entitled “Trademarks” which reflects that Kae has made afiling with the U.S. Patent and Trademark Office for the trademark“Kae-Jin Cookin.’” She has made the filing in her own name. You askJin about this and he tells you he knows nothing about it.
Jin tells you he has recently been in a car accident in which hiscar was heavily damaged. He says he drove to northern New Jersey tomeet with a prospective provider of vegetables for the restaurant.After the meeting, Jin drove to Philadelphia to meet an old collegefriend. The accident occurred in southern New Jersey just beforethe border with Pennsylvania. Jin advises you that he expects“Kae-Jin Cookin” to reimburse him for the damage to his car.
In the restaurant’s tax filings, Jin has characterized allrestaurant employees as “independent contractors.” You ask Jinabout this and he tells you he did this to save money, mostly toavoiding paying employee benefits, and to avoid liability “if theydo something wrong.”
Write a brief memo to your audit partner outlining the issuesyou see arising from the facts in paragraphs 1-5 above, explainingany potential breaches of obligations or potential liabilitiesregarding (i) the business and (ii) Jin and Kae individually. Youranswers should be based on the form of business you selected inEssay No.1.
