Question

Joe is a pastry chef and he wants to open up a bakery but does not have the funds to do it on his own. He was also denied a loan from the bank. He is not sure whether he should form a general partnership with his friend from pastry school or a limited partnership with his rich cousin who is a plastic surgeon and doesn't know anything about running a bakery.

1. How could you advise Joe?

2. What would be the practical differences between the two scenarios?

Answer 1

A) In this particular case, I would suggest should Joe having a general partnership with his friend as it will help him to not only secure investment but bring talent, expertise & leadership from the same domain.

Here are other reasons:

• In this, the partner which is his friend will contribute on a daily basis & be involved in the affairs of the firm.
• The partner will have the authority to make a decision and be legally bound by the company hence both will put efforts to make the company successful.
• Overall all the liabilities, contribution and roles will be equally divided amongst themselves.
• Having a friend from the same industry will add more credibility to the firm and if shown success will help build creditworthiness and not leading to rejection of loans.  
• The support & faith from external stakeholders will be great.

Since it is a new idea and will require the experience to fight many challenges it will be preferred to have a friend equally involved from the same industry.

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B) Here are the practical differences between the two scenarios:

• In limited partnership as in the case with a rich plastic surgeon, the relationship might not involve him, being involved in day to day basis.
• Also in limited partnership since the partner doesn't have a decision-making power he won't be allowed to withdraw the funds without the approval of a general partner.
• In limited partnership cases, a general partner Joe will be responsible for payment of any sort of debt.
• Only the general partner assets can be used to pay off any company debts which may arise in future hence the risk is not shared and more will be borne by Joe.

The overall control of the surgeon would have been less but also on the otherwise he wouldn't have been of much support other than finances. The debt or loss situation will be the responsibility of Joe in a limited partnership and hence the surgeon has his risks covered whereas in other case both Joe & his friend will take equal accountability of rewards and losses.

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