Caroline and Max are the majority owners of a diner but have been struggling to kick-start their cupcake business. Advisor to Client asked two business planning experts how the friends can structure their two businesses for success.

Subject: Max Black and Caroline Wesbox Channing, 2 Broke Girls

Problems: wealth accumulation, business planning

Watch: Mondays at 9 p.m. ET on City

Assumption: For this series, we use Canadian laws and planning strategies.

As the show’s name suggests, Max and Caroline are broke waitresses in a Brooklyn diner, but how they each got there couldn’t be more different. Max was raised by a single mom and has been struggling to make ends meet all her life. Caroline is the rich daughter of a Wall Street banker and is suddenly homeless when her dad is arrested for operating a Ponzi scheme.

The friends dream of starting a cupcake business. They begin saving the money needed to open a store by taking on menial jobs and launching Max’s Homemade Cupcakes, a catering company they operate from their apartment.

The women weather many ups and downs, including receiving $250,000 for a movie deal, facing the closure of the baking school Max attends and having their savings stolen on a trip to Texas. However, they make one good decision: at the beginning of the most recent season (season six), they use the $250,000 to buy majority ownership of the diner.

As of the Season 6 finale, they have just $7,836.72 in the bank, but they now own the diner and have a counter inside the restaurant where they sell their cupcakes.

Creating a focused business

David Burnie, partner at Ottawa-based financial services firm Ryan Lamontagne, says the first step for Max and Caroline is to write up a formal business plan to outline their goals for their cupcake business.

There should be two parts to the plan, he says, the first being “the philosophical part.” Why are we doing this? Is there competition? How can we be different?

To differentiate, Burnie says the friends could go in one of two directions. “You can either be different by being the low-cost provider, which would mesh with their diner ­­­— not a high-class restaurant, no doubt. Or they can differentiate by going the complete opposite, saying, ‘We’re going high-end.’ You wouldn’t sell as many [cupcakes], your costs would be marginally higher but you’d get a much higher margin that way.”

With the philosophy of their business determined, Max and Caroline can continue to the other half of the plan, which is the numbers side: determining what’s feasible. While choosing the low-cost option would increase the bakery’s cash flow, the high-end market position could increase traffic to the diner, which would be beneficial.

Burnie says, “I would make it so the customers have to come in through the diner — like these resorts where you have to go through the gift shop to leave.”

Also, the equipment at the diner can be used to bake the cupcakes, and the staff can be trained to bake and sell them, leading to cost savings for the bakery and growth for the diner.

However, Michael Newton, a managing partner at accounting and business advisory firm FL Fuller Landau, warns all business plans can look great on paper. The friends should vet the plan with friendly and experienced business experts who can provide criticism and guidance.

“Pitch to people within the community who have the entrepreneurial experience to poke holes in the business plan. Many people get defensive and thrown off, but you have to be prepared to have somebody tell you it doesn’t make sense and [to] take that information and decide whether it needs to be changed.”

He says they could potentially leverage their relationships with smart regulars at the diner to get insights from experts in finance, planning, human resources and more. “A lot of private businesses have gone the road of trying to build some form of advisory board. And that sounds really posh and expensive. But the reality is, if you know people who happen to have business experience, you want to get together with them once in a while.”

Structuring the business

Though Max and Caroline’s cupcake window is inside their diner, Burnie suggests they structure the cupcake venture separately. “Do it as a partnership between the two of them as sole proprietors. Even if the diner is incorporated, I would separate the cupcake business, because if they take any losses on the partnership in the early years, those losses can be used to offset income they get from the diner.” Later, if the cupcake business becomes profitable, the friends can incorporate.

“If they’re making more money than they’re spending or one of them has a child, they can start income splitting in a corporation or leave [income] in the corporation and take a lower tax rate,” he says. Income splitting would be beneficial for a child over 18 if he or she is named a shareholder of the corporation and receives income through dividends rather than salary, as the first $40,000 or so of dividend income is tax-free in Ontario, Burnie explains.

Or, if the friends take a lower salary and leave surplus income in the corporation, those funds are taxed at a much lower small business tax rate than a marginal income tax rate, he continues. Further, accumulated income could eventually become a pension, for example, or an education fund.

The partnership agreement should include matters like death, disability and work effort, he continues. For instance, they could agree to have work effort at 85%, meaning the two friends work about 85% of all possible hours; if there are 40 hours in a work week, then they’re expected to be working at least 34 hours. If effort drops below that, then the consequences should be outlined in the agreement.

In addition, Newton says Max and Caroline should structure their personal finances so money troubles don’t negatively affect the business. (Caroline likes to shop.) This could also be included in the partnership agreement. “You need to have a safeguard in place where the other partner is comfortable that their issues are not necessarily going to come back to haunt them,” says Newton.

Increasing savings and getting insurance

The friends struggle to save for their business. After six seasons, they’ve only saved about $6,500. Newton suggests an out-of-sight, out-of-mind tactic.

“A lot of small businesses have a savings account they’ll set up, even at a different bank, and, once a month, they’ll put some money on the side for a rainy day.”

Burnie says the cupcake business needs to be insured. This is clear in season two, when a musician falls outside the front door of the girls’ cupcake shop (they were renting retail space at the time) and sues them. Since the business isn’t insured, they use alternate methods to convince the man to move on.

The biggest concern is liability coverage, says Burnie. “What if there’s a fire [that] burns down the house next to you? As business partners, there would be no corporate bailout.”

Despite their struggles, to make ends meet and grow their cupcake business, Newton says they have an advantage over other partnerships. “The hardest thing in a small business is trust. But, if I trust you implicitly, I don’t have to worry about that. Half the battle of business — especially in smaller businesses — is being with someone you can tolerate every day.”