Question

After graduation, four college fraternity brothers decide they want to form a business together. They want to open a sports bar on some property that recently was put up for sale adjacent to the local stadium. The fraternity brothers are not yet sure whether they want to make equal investments and have equal control over the partnership. However, each brother is able to invest a maximum of $20,000. The fraternity brothers are open to considering any of the different forms of business organization frameworks available to them.

Please correctly answer the questions below AND provide a complete explanation for your answer.

1. Because there are multiple people interested in creating a business organization, the fraternity brothers cannot utilize which type of business organization?

2. Suppose the fraternity brothers are considering forming a partnership. What would be one major disadvantage of this option?

3. Suppose that the fraternity brothers decide they indeed want to form a partnership. If all the partners agree that they want to share the management responsibilities and profits equally and accept equal personal liability, they should form a ___________________.

4. Suppose that instead of a partnership, the brothers decide to consider a corporation. What is an advantage of a corporation that they might find tempting?

5. What is one major disadvantage of a corporation that the fraternity brothers might face should they decide to incorporate?

6. Suppose the fraternity brothers want to combine the tax advantages and management flexibility of a partnership with the limited liability of a corporation. What type of business organization should they form?

7. Ultimately, the fraternity brothers decide to form a limited liability company (LLC). Under this form of business organization, what is the magnitude of liability each member of the LLC would face?

Answer 1

1. They cannot form a Sole proprietorship which means ownership by one person.

2. In a partnership, they will be personally liable for firm's liabilities. Assume, the firm cannot repay a $100000 debt, in that case, personal assets of all partners can be sold to recover equal debt (Or in proportion to the stake the in company) from each partner.

3. This is an example of a general partnership - Equal share of profits and losses.

4. A corporation can raise money by selling a stake in the company. The need not put their $20000 rather raise funds from the public for a stake in the company. They can raise a huge amount thru this method.

5. Corporate income is taxed twice:

• The corporation is taxed for the earning
• Earnings paid to shareholders are also taxed

6. They should form a Limited liability company( LLC)-tax advantage and gives the flexibility to manage

7. The liability will be limited to their maximum investment i.e. $20000