2. Lila is considering investing $60,000 in a limited partnership which is raisi

Question

2. Lila is considering investing $60,000 in a limited partnership which is raising additional capital. According to the prospectus, for the past 10-year period the average earnings have been 12% and for the past 5-year period the average earnings have been 9%. Lisa is in the 28% tax bracket.

a. List some factors Lila should consider in making a decision on the potential investment.

b. Assuming the partnership finances its activities with equity rather than debt, what is the maximum cash flow benefit la can receive if the partnership generates losses?

Explanation / Answer

Limited Partnerships: in which partners can choose to limit their liability and input. A classic example of these types of partnerships are businesses that are run as silent partnerships—one partner is the “money” behind the operation while the other assumes all the responsibility of running the business.

There are few things which need to be considered by Lila before entering into investment:

1. Lila should asses her current financial state.

2. Lila should aware about her long term goals.

3. Check the past return on investment and risk associated with the investment.

4. Lila should also assess the team of partners.

5. how dispute will resolve, under what law.

6. Lila should also check her tax laibilities while entering into limited partnership.

7. How benefits will be shared between limited and unlimited partner.

8. Need to take care any disclosure requirements.

9. What all organisational flexibility is there.

Ans b) Since partnership generates losses there will be no cashflow will be genarated from this investment bebacause investment is in equity. Though she can get some cashflow if she claims tax befenits on thses losses.

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