Brandy and Sherry have been colleagues for many years. Brandy invested $10,000 i
ID: 2750508 • Letter: B
Question
Brandy and Sherry have been colleagues for many years. Brandy invested $10,000 in their joint business, and Sherry invested $15,000. Their firm, BS, distills liquor. BS has $25,000 in debt. One day, their employee Guiness drinks all of the stock, and takes all of BS’s cash, software, and other assets, to flee to Cuba where there is no extradition treaty. Guiness was last seen boarding a plane in Canada using a one-way ticket bound for Havana. If BS were to go bankrupt as a result, what would happen to Sherry (in terms of her (1) equity and (2) debt) had the firm been structured as:
a. a corporation;
b. an LLC; or
c. a general partnership.
Explanation / Answer
If BS were to go bankrupt, then its effect on Sherry would be as under:
a) If the firm had been structured as a Corporatiion:
Stockholders of a corporation have limited liability as per law. They are not liable for the debts of the corporation. They are not called upon to pay anything more than the amount due on the shares taken up by them. As such Sherry would not be called upon to contribute to the assets of the firm in order to pay off it's debts. Sherry's personal property will also not be encumbered.
But, Sherry will not get anything against her investment in stocks of the firm in the event of winding up, as the corporation has only debts and has no assets.
b) If the firm had been structured as an LLC:
In this situation also , Sherry's liability to the LLC's debt is limted to the amount that she has contributed to its capital. She has no personal liability for the debts of the LLC..
But, the amount that she has contributed as equity ie: $ 15,000.00 will not be realised if the firm goes bankrupt, as the firm has only debts and has no assets.
c) If the firm had been structured as a general partnership:
In this situation, Sherry has unlimited liability as regards the debts of the firm. She can be called upon to contribute to pay the debts of the firm. Besides, she is personally responsiblie to pay the entire debt of $ 25,000. Her personal properties are also liable to be appropriated.
As regards her contribution of $ 15,000 towards the capital, it will be lost as the firm has only debts and no assets.