Business Formation

Steps to Take Before Money Changing Hands

The first step before creating a general partnership is to set clear expectations. Partners should transparently familiarize and communicate with each other at a personal level to establish shared goals (Kubasek et al., 2022). Since Duane, Camala, Betty, and Adam are friends, they should agree on clear goals and expectations before exchanging money. For instance, since Adam and Betty were going to be involved in the business full-time, they should have agreed with Duane and Camala that this would not be a problem.

Also, prospective partners should ensure value alignment. This assessment goes beyond members’ interest in profits to the shared vision. For instance, there was a need to ensure that the four partners—Duane, Camala, Betty, and Adam—were all interested in events marketing. The business interest should be value-driven, such that members are more focused on improving the state of events in the market, with profits being secondary. Value-driven businesses tend to have strong financial performance in the long run (Kubasek et al., 2022). However, the case was different as it seemed Adam was motivated by unemployment, while other partners just wanted an extra income source.

Another key step before establishing a partnership is to agree on the exit strategy. While preparing for how great things may turn out, preparing for things going wrong is also important. A written agreement showing how the individual members may exit the partnership, how the partnership will be dissolved before the partnership starts, or how money will be exchanged hands is important.

Furthermore, it was crucial to determine the roles and responsibilities of every member and have it in writing. This requires a balance between time and money members have to offer. This seems to be one of the mistakes the four partners, Duane, Camala, Betty, and Adam, made in executing their partnership. Since Duane and Camala were unavailable for full-time business roles, they should have offered more capital contributions from the outset to qualify for equal profits. This would compensate for Betty and Adam’s time, as the two manage the business full-time.

Choice of Partnership Type

The type of partnership that would have been the best for Duane, Camala, Betty, and Adam is a limited liability company (LLC). This is partly because of the significant sums of money that the members were asked to contribute ($2,000). Unlike a general partnership, which they formed, there is a strict regulatory framework around a limited liability company (LLC). One of the arrangements of a limited liability partnership (LLP) is that it sets guidelines for the inclusion of non-active partners who do participate in running the partnership but are entitled to profit sharing based on their capital contribution (Aspan et al., 2021). In case one of the partners decides to exit, their buy-out is clearly defined in the agreement deposited with the regulator.

Another viable option would have been a limited partnership (LP). A limited partnership requires at least one general partner and at least one limited partner as members before formation. One key distinction between an LP and a general partnership is that an LP must be registered formally (Deards, 2003). Besides, an LP is characterized by flexibility, allowing members who cannot actively participate in its daily operations to be part of the partnership. Although LPs may be used to trade and run professional niches, they are predominantly used as investment vehicles (Deards, 2003). Another crucial feature of LPs is that the limited partner’s liability is limited to their initial contribution. For the partnership in the case, Duane and Camala’s liability would be limited to their $2000 contribution since they were not involved in the daily management of the company.

The Implication of Non-Cash Contributions in Partnerships

According to Utz (2002), contributions to a partnership vary in amount and type. Contributions to a partnership may include cash, ideas, and sweat equity (the time spent in running a partnership). That means that partner equity does not necessarily imply that the partners make equal cash contributions. Partners can make equal contributions and have equal ownership, but the contributions constitute different forms, including cash and non-cash contributions. Just like cash, non-cash contributions such as time and expertise should also be factored into determining how members of a partnership will share the cash.

To that end, Adam, Betty, Camala, and Duane should have drafted an agreement that highlights ownership percentages based on contribution. Since the four partners made equal cash contributions and Adam and Betty dedicated themselves to managing the company full-time, they should have had higher ownership percentages. With higher ownership and authority, Adam and Betty were entitled to more than 25% of the business’s profits, unlike Camala and Duane, who were not actively involved in running the company.

Partnership Agreement

The partnership between the four friends should have included a partnership agreement. While an explicit written agreement is not required to create a partnership, partners are advised to draft one to ensure that the terms of a partnership are adhered to (Kubasek et al., 2022). The four partners should have drafted a written agreement to create a partnership. The document is referred to as articles of partnership. The following details should have been included in the agreement: names of partners and partnership, partnership duration, profit/losses sharing and division, division of management duties, and partners’ capital contributions.

References

Aspan, H., Indrawan, M., & Wahyuni, E. (2021). The authority of active partners and passive partners in the company type of commanditaire vennootschap. American Journal of Humanities and Social Sciences Research, 5, 310–313. https://www.ajhssr.com/wp-content/uploads/2021/05/ZF2155310313.pdf

Deards, E. (2003). Limited partnerships: Limited reforms? In Journal of Business Law. https://irep.ntu.ac.uk/id/eprint/22217/1/186403_4068%20Berry%20Publisher.pdf

Kubasek, N. K., Browne, M. N., Herron, D. J., Dhooge, L. J., & Barkacs, L. L. (2022). Dynamic business law (6th ed.). Mcgraw-Hill Education.

Utz, S. (2002). Allocation and reallocation in accordance with the partners’ interests in the partnership. The Tax Law, 56, 357. https://www.jstor.org/stable/20772392

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PAPER: BUSINESS FORMATION ASSIGNMENT INSTRUCTIONS

Four friends went into business together operating a night market, holding big events in a local city every two weeks. Each of the friends contributed $2,000 in cash for start-up capital, expecting a 25% interest in the company.

• Adam had the business idea and asked Betty, Camala, and Duane to be part of the business. Adam was unemployed at the time and was available to work on the events 100% of the time.
• Betty had a part-time job, but quickly decided to quit and work for the company full time.
• Camala was 6 months pregnant and was available to help when the company started but soon had the baby and plans eventually to go back to her job as an independent contractor.
• Duane had a full-time job and would only be able to provide limited support, mostly in marketing the events.

The friends used a generic online legal form to create an LLC as equal members but did not create an operating agreement because the state didn’t require one.

By the third event the markets had already become popular and were bringing in a lot of money. Adam and Betty started to push “buyouts” on Camala and Duane, suggesting that Camala and Duane were somehow bad friends to expect 25% of a company they were not going to work at.

Adam and Betty have now basically hijacked control of the company, blocked access to bank accounts, business documents, accounting, and funds to anyone but themselves. Camala and Duane have not seen a dime of the profits. Adam and Betty seem to only want to talk about their original buyout offers of $5,000 for Camala, and $8,000 for Duane, with no ongoing ownership.

While the facts may vary, such casual business startups among friends or family are common. This scenario demonstrates all the things that can go wrong without proper planning.

Business Formation

Question:

If these friends had come to you before starting the business, how would you have advised them?

Include in your analysis:

• What steps should have been taken before money changed hands?
• Is an LLC the best option? Some form of partnership? Other options? Explain your choice thoroughly.
• While the friends each initially contributed cash, how should they value the non-cash contributions of time and labor in determining ownership shares, distribution of profits, etc.?
• Was an operating or partnership agreement necessary? What should have been included?

Support your analysis with at least 3 scholarly sources other than the course materials, cited in-text and in a reference list. You must also integrate Biblical worldview analysis.

This paper must contain at least 825 words and follow current APA format but does not require an abstract. The title page, abstract (if you include one), and reference list do not count towards the length requirement. Submit your paper as a Word document.

Note: Your assignment will be checked for originality via the Turnitin plagiarism tool.