George, Kim, and Martha have decided to open a Polynesian restaurant that specializes in Asian food and tropical drinks. George has no personal savings; however, he has a bartender’s license as well as seven years of experience as an assistant manager at a large restaurant. Kim recently inherited a large sum of money and is interested in investing some of it in a business opportunity. However, as a full-time medical student, Kim has neither the time nor the desire to operate the business. Martha has personal savings of almost $20,000 and is willing to invest some of it in the restaurant. However, she also wants to set some money aside for her son’s future college expenses. She plans on working full-time with George as co-manager of the restaurant. George, Kim, and Martha are now trying to decide which form of business organization they should select for the restaurant.
In the case given, the best possible form of organization which these three friends can form is Partnership firm. This kind of firms can be formed between different parties on the basis of their agreed terms and conditions. In order to provide protection to the benefits and concerns of all, the partnership deed can be made which is a legally bound document and all the members will be forced to follow the terms and conditions mentioned in the partnership agreement.
Limited liability companies, or limited partnership can be the best form of organization which can be formed in order to protect the Kim’s and Martha’s uncommitted savings as in these types of organizations, the investors are liable only up to the amount which they have invested. The creditors and plaintiffs cannot claim on the personal assets of the owners.
1) Which form will provide the greatest relief from tax liability? Explain.
2) Which form will be best suited for raising necessary operating capital if Kim’s and Martha’s contributions should prove inadequate? Explain.