Tony and Susan are starting a retail business selling formal wear for men and women. They estimate profits and losses for the next five years to be: ($20,000), ($10,000), ($5,000), $10,000, and $50,000 respectively. Susan will work full time in the store while Tony will be involved in managing the operations. Susan is married to Tom and is in the 28% marginal tax bracket. Tony is single and has other sources of income that put him in the 28% marginal tax bracket. Susan will be paid a salary of $30,000 for the first five years, after which her compensation will be reviewed. Tony and Susan each contribute $50,000 to get the business started.
The remaining question facing Tony and Susan is which business form to use for the business. They believe they should operate as a partnership but have been informed that forming a corporation might be a better option since it would limit their liability. Prepare an analysis to determine whether Tony and Susan should operate their business as a partnership or a corporation.
Tory, Becky, Hal, and Jere form TBHJ Partnership as equal owners. TBJH Partnership rents heavy tools and equipment. Becky and Hal are married to each other while Tory and Jere are brothers but are not related to Becky or Hal. Because Becky and Hal have other jobs, Tory and Jere are to be the full-time managers of the business. Although Tory and Jere will run the business full-time, Becky will help in the store on weekends and some evenings. Hal will lend his financial expertise to the firm by doing the bookkeeping and preparing the tax returns. Even though the four have equal ownership interests, it is not clear how each owner is to be compensated so that there is equity among the partners yet rewards for those engaged in specific tasks. Hal has told the others that they cannot receive deductible salaries. However, he suggests that guaranteed payments be made to each partner/ employee for an agreed-upon amount based on the value of the services each provides and/or the time spent at the store. Discuss the ramifications of employing this plan and whether this is an equitable way to allocate compensation among the partners. What are the implications of this arrangement for the partners and the partnership?