The San Diego Bay Boat Storage and Marina Corporation (\"Bay\") was formed in 19

Question

The San Diego Bay Boat Storage and Marina Corporation ("Bay") was formed in 1999 as a C corporation and has substantial accumulated earnings and profits. Bay's business consists of three primary activities. About one-third of Bay's gross receipts are derived from marine service and repair work conducted by its two mechanics. Another one-third of Bay's total receipts come from the rental of berths to boat owners. Berthing fees vary depending upon the size of the particular boat. A boat owner renting a berth from Bay must pay a separate charge to have Bay's employees launch or haul out his boat. However, if given advance notice, Bay employees will fuel an owner's boat, charging only for the fuel. The remainder of Bay's receipts come from dry storage of boats. Owners pay $200 per month for dry storage in Bay's warehouse where a Bay employee is on duty 24 hours a day. For this fee, Bay employees will launch, fuel (with a charge for fuel) and haul out the boat whenever requested by the owner. Bay's mechanics also will perform a free engine analysis every other year for owners of power boats in dry storage.

Bay is considering the possibility of making a Subchapter S election and has requested your advice concerning any problems which it may have. What difference would it make if Bay were a newly formed corporation?

Explanation / Answer

The Bay should make a subchapter to expand their business after analysing the following issues –

The mechanics are required for almost all three sources of income, so the Bay needs to ensure that they have mechanics available for new chapters also

There should be enough space for dry storage of goods

The locality should also be chosen carefully to ensure that operating cost in not more than revenue inflow

The economies of scale can be obtained if the new chapter is close by the existing chapter

The customer’s Prefrence should also be considered

If the Bay were a newly formed customer –

The fund management and arrangement could be an issue

It takes time to make Goodwill and Customer base

The initial operating cost will be more than revenue

The whole set up and business will be more challenging

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