LAW QUESTION 500 words: John and Jay are fellow graduates in counseling psycholo
ID: 466361 • Letter: L
Question
LAW QUESTION 500 words: John and Jay are fellow graduates in counseling psychology at Yorkville University. After having worked on various projects together during their time at Yorkville University, they discovered they actually lived in the same community, met one another, and soon found they enjoyed each other’s company and found synergies I their work habits. They now plan on renting some space and opening a clinic together on the cool side of town. John’s parents have agreed to provide a five year interest free loan of $20,000 to assist with start-up costs. Jay’s dad, a carpenter by trade, has agreed to help with renovating the shop. How might the business be structured so as best to ensure both Jay and John’s interests are fully protected? How might the loan be structured?
Explanation / Answer
The business should be structured as general partnership where the partner manage the company and assume responsibility for the partnership debts and other obligations. In limited partnership some partners can act as investors and have no control over the company and are not subject to the liabilities. John and Joy can form this type of partnership, and can make john’s parent as partner who act as a investor and has no role in company’s daily affairs. Jay’s parent can provide their own contribution which can be also considered as investment at initial stage and they can also be made stake holder. In this way each partner’s interest will be saved and the company also gets investment which needs to run its operations. The major advantage of a partnership is the tax benefit that they enjoy. A partnership doesn’t pay tax on its income but passes through any profit or loss to its partner. Personal liability is the major concern in partnership to structure the business. The partners are generally liable for the partnership’s obligations and debts. In this, both Joy and john hold the major share and are equally responsible for the decision making and operation of company. It requires more legal and accounting services thus is more complex than proprietorship but in this case this is the best option to save the interest of both the partner. Another advantage of including their parents is that they are also get the share for their part and are legally involved in the company. This structure helps them to enjoy as an investor and not involved in business activities which was their aim thus not liable to the company. It also makes the company legally responsible for providing them their return on investment after certain period.
The loan should be structured in a manner that the company receives the investment in parts after certain periods. The amount should be disbursed only after the evaluation of performance of last investment and future prospects. Initial amount should be invested to cater fixed mandatory start-up cost. The followed up investment will be depending upon the performance of company. This will prevent the investment in wrong direction i.e. even if company is making losses. The cash flow should be calculated and on its basis the revenue model and pricing will be decided. The loan can be further divided into cash flow loan and working capital loan. Cash flow loan can be used can help the business to meet its day to day needs while working capital loan can be used to finance everyday operations of the company. In this way the total loan amount can be utilized in an effective manner.
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