Sweat equity

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Three family members go into the pizza business. Ernie Bilko has some pizzeria business experience. His uncle John Hall is willing to invest. Ernie's cousin, Duane Doberman, has some spare cash and spare time. John, who knows nothing about pizza, puts up $80,000 cash and hopes for a 10 percent return on his investment. Ernie contributes only $5,000, but he wants annual pay of at least $36,000. Duane invests $15,000 and agrees to be part-time bookkeeper and responsible for obtaining permits, licenses and insurance. Ernie will be in charge of the kitchen and the hiring of employees. Ernie will also be in charge of leasing the space needed for the business and contracting with vendors for the equipment necessary to start up the business. All three of them expect that it will take at least a year before the business turns a profit.
The three can't decide if they should incorporate the business as Pizza Baxter, Inc.; or a Partnership doing business as (dba) Pizza Baxter or a limited liability company.

a. Should the ownership interests be proportionate to their capital contributions or should some credit be given for "sweat equity"?

Let us discuss first of all the forms of organization:
Sole Proprietorship
This organization is owned by single person and is the simplest form of organization. He is fully responsible for all debts and obligations related to his or her business and have got unlimited liability.

Advantages
? Ease of formation
? Low start-up costs
? Less administrative paperwork than some other organizational structures (such as incorporation)
Disadvantages
? Difficulty raising capital
? Unlimited liability
? Lack of continuity in business organization in the absence of the owner

http://www.cbsc.org/servlet/ContentServer?pagename=CBSC_ON%2Fdisplay〈=en&cid=1085667968842&c=GuideFactSheet as retrieved ...