1. Bruce and Robin were crime-fighting private investigators. They executed a pa

Question

1. Bruce and Robin were crime-fighting private investigators. They executed a partnership agreement to conduct their private investigation business. In its year of operations, the partnership had losses. The partnership agreement is silent with respect to the sharing of losses and profits. However, Robin claimed that he was responsible for 30% of the losses and Bruce was responsible for 70% because Bruce was the manager and main investigator. Bruce insists that Robin is responsible for 70% of the losses because the reason the partnership didn’t do well was because Robin was lazy and was only available to work part-time. Who is correct, Bruce or Robin? Why? (5 pts)

Now suppose that in the following year, the partnership is profitable. Robin maintains that even though the partnership agreement is silent with respect to profits because he provided 60% of the capital contributions when the partnership was started, he deserves 60% of the profits. Is Robin correct? Why? (5 pts)

Suppose the partnership agreement did provide that the partners would share losses 60% Bruce and 40% Robin but the partnership agreement is silent with respect to profits, and in the following year the business does very well, and the partnership reports profits at the end of the third fiscal year. How do the parties share in the profits for year 3? (5 pts)

2. Sansa is an entrepreneur and is looking to start her own business. Her sister is interested in investing in the business with Sansa, but Sansa’s sister is concerned about being personally liable if the business does not do well. Sansa also would like to limit her sister’s personal liability. Which business forms should Sansa and her sister consider to limit their personal liability (for both of them!)? Discuss one disadvantage of each of the business forms you are suggesting for Sansa and her sister. (5 pts each)

3. Rafael is a partner in ABC Company. There are three other partners in ABC Company, Donatello, Michelangelo, and Leonardo. Rafael shares the management responsibilities with the other three (i.e. none of the partners are limited partners). Rafael just became in charge of the manufacturing processes of the products that ABC Company sells. Although ABC Company has purchased two of its important inputs for the manufacturing of these products from D Company for many years, when Rafael took over the manufacturing processes, he realized that these inputs are produced by F Company. It turns out that Rafael is also a limited partner in F Company (so although he doesn’t manage F Company, he shares in the profits). Rafael decides to have ABC Company purchase these inputs from F Company, and approaches the other partners at ABC Company about his plans and asks them to approve. He explains that although it may seem like he is being biased because he is part owner of F Company, he believes that F Company can provide the best quality at the lowest price. Can Donatello, Michelangelo and Leonardo bring a claim against Rafael for making this decision? Why not? (10 pts)

If Rafael has signed an agreement with F Company prior to meeting with the others about his plans, would that change your analysis? (5 pts)

4. Roxie, the owner of Simply Sushi, is a sole proprietor. Roxie wants to obtain additional capital to expand Simply Sushi, but she is having difficulty getting approved for a loan from the bank to do so. She is concerned about having to pay too many taxes on earnings. Roxie is contemplating converting Simply Sushi into another business form. What is Roxie’s best option to attain all of her goals of more access to capital while minimizing taxes?

Explanation / Answer

1.      Bruce and Robin were crime-fighting private investigators. They executed a partnership agreement to conduct their private investigation business. In its year of operations, the partnership had losses. The partnership agreement is silent with respect to the sharing of losses and profits. However, Robin claimed that he was responsible for 30% of the losses and Bruce was responsible for 70% because Bruce was the manager and main investigator. Bruce insists that Robin is responsible for 70% of the losses because the reason the partnership didn’t do well was because Robin was lazy and was only available to work part-time. Who is correct, Bruce or Robin? Why? (5 pts)

ANSWER- Partners – Bruce and Robin

Roles – Bruce – Manager and main investigator

Robin – Part time in work

The claim of Robin is valid and correct.

Justification -

As Bruce is the Manager and main investigator and Robin is working part time for the firm, this condition was known to both the partners at the time of inception of the partnership, no matter the clause of losses and profits sharing is not written in the agreement but calling Robin lazy after the year has completed and losses have been faced cannot be justified. Bruce being the Manager and main investigator had the responsibility of taking care of participation of the other partner in the work on time, not after losses being faced. Robin worked part time, this is also one reason for him to be less responsible in bearing the losses of the firm. It was the duty and responsibility of the both the partners but more responsibility of running the firm was accepted by Bruce and Bruce being the manager and main investigator whereas Robin being part time available proves this fact. In another condition, if Robin being part time was not agreed or discussed in the beginning then too, it was the responsibility of Bruce to take care that the other partner also works efficiently and in case, the work behaviour was found to be lazy, then there should have been written communication to make the formal partnership and other conditions clear.

Now suppose that in the following year, the partnership is profitable. Robin maintains that even though the partnership agreement is silent with respect to profits because he provided 60% of the capital contributions when the partnership was started, he deserves 60% of the profits. Is Robin correct? Why? (5 pts)

ANSWER – In this case Robin is not correct.

Justification – 1. As there is no clause on profits and losses in the partnership deed therefore the profits have to be shared equally amongst the partners. There can be one condition that the partnership agreement has clause for interest on capital, in that case out of the profits first the interest on the capital utilized shall be paid to the partners in the ratio of their investments and the balance profits shall be distributed equally amongst the partners. In case there is no clause for interest on capital, then profit has to be equally distributed amongst both the partners, irrespective of capital invested ratio or time invested as well. Partners are partners and have to share the profits equally. Bruce being the Main investigator cannot claim more and Robin, who has invested more than Bruce also cannot claim more than Bruce but they have to share equally for the profits.

Suppose the partnership agreement did provide that the partners would share losses 60% Bruce and 40% Robin but the partnership agreement is silent with respect to profits, and in the following year the business does very well, and the partnership reports profits at the end of the third fiscal year. How do the parties share in the profits for year 3? (5 pts)

ANSWER – If the partnership agreement states losses shall be shared 60% by Bruce and 40% by Robin, in that case automatically profit sharing ratio also becomes same. This clause nowhere states that profits shall be shared in different ratio and it should be shared same as the losses. As this is the third year of the partnership, then the two year profit / loss sharing ratio can be followed same as done earlier. If losses have been shared in the given ratio then profits have also to be shared in the same way.

Second possibility can be sharing profits equally, as it is often understood regarding profits sharing to be done equally amongst the partners in the absence of profit sharing clause in the partnership agreement.

2.      Sansa is an entrepreneur and is looking to start her own business. Her sister is interested in investing in the business with Sansa, but Sansa’s sister is concerned about being personally liable if the business does not do well. Sansa also would like to limit her sister’s personal liability. Which business forms should Sansa and her sister consider to limit their personal liability (for both of them!)?

ANSWER – Sansa and her sister can invest in a small business to limit their personal liability. The investment can be of equity investment type. When one invests in a small business as equity investment, in that case it limits the liability because equity investors get profits proportional to their investments.

The best business which will help Sansa to start up and also to accept her sister’s investment and not giving her more liability, can be consulting and event management. This business will not need more investment in terms of inventory which can be dead or outdated, which will lessen one chance of losses or liabilities for both of them. To remain updated with event management, Sansa can take help of recent trends in event management through internet and other easy means as well. This small business can be expanded with time and investment can be limited or added as and when needed or felt to invest more. The investment shall be mostly in property which shall be safe enough for both the investors as well. This business shall not be risky for both the investors and shall have many opportunities in future. Also, Sansa can be relaxed about her sister’s limited liability because she will get help in investment and with her good planning and management she can provide good returns to her sister and in case of losses there would not be losses of the property in which they have invested, losses may occur in form of less assignments or outdation of material purchased, which can be overcome with good management and planning.

Discuss one disadvantage of each of the business forms you are suggesting for Sansa and her sister. (5 pts each)

ANSWER – One disadvantage for starting consulting and event management as the small business for the girls can occur due to less knowledge or no experience. For a new comer to stand high in consulting and event management business is bit difficult because of so much competition in the field. This business is rewarding once the customers’ needs and requirements are understood well. The consulting work needs more of patience which is more needed than any other business. In event management, they will need to be patient, friendly, understanding and updated knowledge. Event management business can be rewarding if the managers have the qualities to hold on for some time until the events actually turn up. Events can be of wedding planning, trips planning, parties etc. Disadvantage can occur only in the form of events not being planned to the satisfaction of the customer, and this can spread bad word of publicity and ultimately less assignments in future. But the same can be turned to advantage also by providing good customer service, which can be assured by studying the needs of the customer before implementing the plans on the event.

3.      Rafael is a partner in ABC Company. There are three other partners in ABC Company, Donatello, Michelangelo, and Leonardo. Rafael shares the management responsibilities with the other three (i.e. none of the partners are limited partners). Rafael just became in charge of the manufacturing processes of the products that ABC Company sells. Although ABC Company has purchased two of its important inputs for the manufacturing of these products from D Company for many years, when Rafael took over the manufacturing processes, he realized that these inputs are produced by F Company. It turns out that Rafael is also a limited partner in F Company (so although he doesn’t manage F Company, he shares in the profits). Rafael decides to have ABC Company purchase these inputs from F Company, and approaches the other partners at ABC Company about his plans and asks them to approve. He explains that although it may seem like he is being biased because he is part owner of F Company, he believes that F Company can provide the best quality at the lowest price. Can Donatello, Michelangelo and Leonardo bring a claim against Rafael for making this decision? Why not? (10 pts)

ANSWER - Donatello, Michelangelo and Leonardo can not bring claim against Rafael for making this decision due to the following reasons –

1.      Raphael is the incharge of the manufacturing processes of the products, so he indirectly reserves the right to decide which company to buy from.

2.      Raphael is a part of F company also which now he feels can sell to ABC company and he wants to replace F company in place of D company which has been selling inputs to ABC company, but the reason he is giving for replacement / change in the input provider company is clearly mentioned to the partners, ie. Best quality in lowest price.

3.      The claim of Raphael can be cross checked in case the other three partners do not agree with Raphael’s explanation, but this cross checking should be done in a smooth manner so that the partnership trust does not get broken and all should highlight that the interest is common for all and that is ABC company.

If Rafael has signed an agreement with F Company prior to meeting with the others about his plans, would that change your analysis? (5 pts)

            ANSWER - If Rafael has signed an agreement with F company prior to meeting with others about his plans then the condition may be reverse. Convincing the other partners after taking the action shall be difficult and trust factor of the partnership shall be in a question. Other partners also reserve the right to give their views in the company’s decisions, especially in those which are being changed after the introduction of a new partner, by the new partner himself.

It is the responsibility and duty of Rafael to discuss and take agreement of other three partners by giving valid justification, on paper, and then proceed for any changes which he wants to implement in the organisation which has partners before his introduction.

4. Roxie, the owner of Simply Sushi, is a sole proprietor. Roxie wants to obtain additional capital to expand Simply Sushi, but she is having difficulty getting approved for a loan from the bank to do so. She is concerned about having to pay too many taxes on earnings. Roxie is contemplating converting Simply Sushi into another business form. What is Roxie’s best option to attain all of her goals of more access to capital while minimizing taxes?

ANSWER –

She can add a partner in her business. This way she shall have all her needs satisfied.

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