I just need jelp with the last two questions. Please be detailed. Peter and Andr
ID: 392966 • Letter: I
Question
I just need jelp with the last two questions. Please be detailed.
Peter and Andrew are brothers. Since childhood, they have wanted to convert a barn on their grandfather's farm into a hunting and fishing lodge that would provide modest but comfortable accommodations for sportspersons using nearby recreational lands. Andrew has suggested that they bring his friend, Paul, into the business, as well. While Peter and Andrew would develop the property. Paul has experience in the hospitality industry and could manage the day-to-day operations. Peter and Andrew would also want to make the lodge available to local church groups for worship retreats. They haven't yet discussed this with Paul, because they know he is not comfortable with most churches and their positions on social issues. The men are now discussing how to form the new business, and have narrowed their choices to a general partnership or a limited liability company (LLC). What would you advise, and why? Consider and discuss issues such as: What personal liability will the owners have for the obligations of the business (contracts, debts, lawsuit judgments, etc.) Should Paul be included as a co-owner, or in some other role? On what do you base that decision? How would contributions to the new business be valued? How would profits and losses be distributed?Explanation / Answer
I can't answer just the last two questions as they have to be in sync with the first two answers as well. Nevertheless, feel free to use only the last two answers and ignore the first two.
According ot me, Limited liability company (LLC) is preferrable over a general partnership.
1) In an LLC, the owners are only liable to the amount they invested in their business. Since they are not managing the day to day operations of the business, it is in their best interest to limit their liability in the event of unforseen loss or injury to the business.
2) No, Paul should not be included as a co-owner. The LLC deal could be incorporated as a manager run LLC with Paul being the manager. Since Peter and Andrew don't have any experience in the industry and are solely based on the experience of Paul, it would be better to shield themselves from the business liability to the maximum extent
3) Peter and Andrew's initial investment to develop the barn into an operable lodge would be considered as the capital contribution by the owners. Since it is a manager run LLC, Paul would not have any capital contribution.
4) The profits and losses would be shared by Andrew and Peter to the extent of their contribution share. As Paul is not a member and just a manager, he would be entitled to get a salary (Base + fixed percentage of the total profits made by the lodge). In the event of a loss, he can be paid only the base part of his salary. Generally the base salary would be very low in these situations thus incentivising the manager to make maximum profits.
Some of the other reasons for choosing a manager run LLC are: