Forming an entity: Five friends in a home building business
Five friends have gotten together to form a home building business. Two of the friends have sizeable assets, but little construction experience. These two also have some experience in running companies. The other three friends have a small amount of capital to invest. Their major contribution to the group is that all three formerly worked for very successful homebuilders, and one individual headed the local division of a national homebuilder for the past two years.
Even with their combined savings, the group realizes that they will need to either obtain bank financing or outside investors. Bank financing will require that the five friends put up their personal assets as collateral. Outside investors will not demand personal collateral, but will demand control. The five friends believe that the company will be a success. Yet, even without having to give a bank personal collateral, they are concerned that if the business fails, they could lose everything they have accumulated.
What type of business entity should the friends form to build homes? Consider whether more than one company should be formed if you believe that other ancillary businesses should be set up at the same time.