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Introduction to Forms of Business and Formation of Partnerships

Introduction to Forms of Business and Formation of Partnerships

After working for a large company for 10 years, you decide to give expression to your entrepreneurial urges and start a business. Your business plan is to help small firms that are struggling with finding ways to make new information technologies affordable and effective for their business. You envision that your business will need a capital infusion of $500,000 for the first year, during which you project the business will have a net loss of $200,000, which reflects in part your salary of $80,000. Beginning with the second year, you believe that the business will generate enough cash flow to finance internally all its normal capital expenditures. You expect second-year losses to be $100,000. Beginning with the third year, the business will be profitable.

You have $120,000 of savings that you are willing to invest in the business. You hope to obtain the remaining $380,000 of initial capital from investors. While you are willing to give a portion of the equity of the business to the investors, you want to control the business, including day-to-day operations. It is especially important that the other investors not be able to expel you from the business or its management.

Question #1: What business forms are best for your business?

Question #2: How will you modify the default rules of some business forms to make those forms work for you?

Solution Preview

Business Form Suitable:

The business form that is best in this case scenario is limited Liability Partnership (LLP). An LLP gives the benefits of limited liability in that the personal assets of the business owners are protected. This is because LLP will be a separate legal entity liable for full extent of its assets. The liability of the members in the business will be limited. In this business form management and business is controlled by the designated person who has responsibilities of secretary of the company. Limited partners not only have limited liabilities in the business, but they are also limited from participating in management. LLP is also appropriate as ...

Solution Summary

The solution discuses an introduction to forms and business and formation of partnerships.