SolarBike Company was formed as a partnership ten years ago by three sisters-in-

Question

SolarBike Company was formed as a partnership ten years ago by three sisters-in-law: Peg McLaughlin, Terry McLaughlin, and Joanie McLaughlin. All three worked diligently to design and produce the SolarBike: an electric bicycle propelled by the sun’s rays. The good news is that the bike is a big hit with environmentalists and last year’s sales reached $2 million. The bad news is that to keep up with growing demand for the bike, the company must expand its capacity at a cost of $1 million. Even though the company is doing well, it’s unlikely that the partnership could get the needed $1 million in funds from a bank. The company’s predicament was discussed at a recent partnership meeting. Not only were the three partners unwilling to lend the company any more money, but also they voiced concern about being held responsible for their own actions as well as for all the partners’ actions. Peg asked the group to consider incorporating and raising funds through the sale of stock. Joanie supported this idea, but Terry was against it. The three partners hired you as a consultant to advise them on whether to remain as a partnership or to form a private corporation. In addition to your recommendation, you should discuss the advantages and disadvantages of both forms of organization and explain how they apply to SolarBike Company’s situation.

Explanation / Answer

The advantages and disadvantages of the partnership firm and private company are as under:

The partnership firm is considered as a separate entity having its own specified terms and conditions for partnership like sharing of profit and loss of the firm, contribution by the partners etc. In the partnership firm the ability to raise fund is good enough as compared to sole proprietorship firm but restricted to some extent. Partners are solely and jointly liable for the actions of the other partners.

The private company is considered as a separate entity. A company can raise its funds by sale of its stock. The shareholders also have limited liability for the corporation’s debts.

Therefore in the case of solar bike company the partners are unable to contribute the capital of $1 million for expansion of the company. And the company is also facing problem in raising the funds from its partners or loan from bank. Therefore it is better if the solar bike company change its partnership firm in to a private company where it can raise the funds with sale of stock or shares.

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