Question

Able and Baker desire to combine their mutual assets in order to go into the trucking

business. Able has three (3) trucks worth $50,000. Baker is willing to pay $50,000 cash.

They each would like to own and control 50% of the business. Also, there is Gary who

wished to invest in the business but only the sum of $2,500. Gary only wants to be

exposed for the loss of his $2,500. Able and Baker cannot decide the form in which they

should operate their business and also they are undecided as to what form to use if Gary

is to participate.

A. If Able and Baker operate without Gary, what forms of organizations are

available to them and explain the advantages and disadvantages of each form.

B. Assume the above business is in New Jersey, what forms of organizations are

available to them if they wish to take Gary into the business on his terms.

Answer 1

A. If Able and Baker want to operate without Gary, the different forms of organizations which are available to them are as follows:

· General partnership: Both Able and Baker can be the general partners of the company with 50% ownership each. They will share liabilities as well as profits in the same 1:1 ratio.

• Advantage: The liability gets shared among the partners, hence there is not much strain on each partner
• Disadvantage: If one partner gets sued, all partners are held accountable for his act and they will also be sued.

· Joint venture: Able and Baker can enter into a joint venture for sometime and later they can come up with their own business line

• Advantage: It is like a short term partnership. each partner can learn from the expertise of the other
• Disadvantage: A joint venture does not propagate equal involvement of partners in business. This may have impact on smooth functionality of business

B. If Able and Baker want to include Gary, they can opt for limited partnership form of business. In this business, there are 2 types of partners – general partner and limited partner. Able and Baker will be the general partners who will be actively involved in running the business. The liabilities as well as profits will get divided between them equally. Gary will be the silent partner of business. He will be held responsible only for the investment that he has poured in business. He will have no say on the general operations of business.