To demonstrate your understanding of the concepts behind stockholders equity and the transactions which support it, read the scenario below and discuss:
Al and Ed, friends since childhood, decided to go into business together. They entered into a partnership in a hot tub spa and tanning parlor, with a retail store selling hot tubs for home use. Al was concerned about his legal liabilities as a partner. Both men would be contributing the same amount of cash to start the business. However, Ed, who was single, lived in a rented apartment, while Al, who was married with two children, owned his own home.
Before they actually drew up the partnership agreement, Al solved his perceived problem by having his attorney transfer the title to his house from him and his wife to his wife and children. He felt this was only fair to protect his family from a potential problem with the business.
Please respond to all of the following questions:
1. Do you think Al was right to be concerned?
2. In personal terms, was this a reasonable solution?
3. Is anyone potentially harmed by his act?
4. Do you consider what he did to be ethical?