Art Fleming is a design engineer with a proven track record in the field of elec

Question

Art Fleming is a design engineer with a proven track record in the field of electronic musical instruments. He recently designed a new VLSI (very large scale integrated) chip. This chip is meant to be the heart and soul of a digital sampling keyboard to be called WAVE. Fleming believes the WAVE will set a new industry standard. He wishes to organize a business enterprise to build and market it. He has a meeting with his lawyer and conveys to her the following bits of information:

a. It will take approximately 2 years to turn the VLSI chip into a marketable product;

b. Fleming has more than $200,000 in savings from previous ventures. He does not want any of that money to be at risk in this new venture. However, he wants part ownership. He is unsure what percentage he wants.

c. Currently, 5 investors are willing to put money into the venture. Only 2 of the 5 want to play an active role in the enterprise. Fleming is willing to give these 2 some limited control.

d. Fleming knows that he is not qualified to manage the new endeavor. Nevertheless, he wants a significant say in how it proceeds.

e. Five more investors could be attracted to this project, but only if they could be guaranteed some fixed return on their money or could realize immediate tax benefits from investing.

f. Fleming would like Scott Ladd, a manager much in demand in the electronics field, to be his CEO. It would take significant incentives to attract Ladd to the enterprise.

Fleming is not committed to using any particular type of business organization; he is interested in weighing the alternatives.

What form of organization should Fleming choose for his new venture? Why? What are the advantages and disadvantages of the form you have chosen? Be sure to support your views with the facts and the law of Business Organization.

Explanation / Answer

Fleming should start a Limited Liability Partnership with the investors.

Limited partnerships limit liability for some partners but not others. A limited partnership has both general partners (who manage the business) and limited partners (who, in essence, are passive investors). The liability of limited partners is generally limited to their investments. The liability of general partners is theoretically unlimited, but can be limited in practice where the general partner is an entity, such as a corporation, with limited liability. A limited partner who takes on what state law considers "too much" management participation is treated as a general partner, losing limited liability. Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners. A still more recent development, not yet adopted everywhere, is the limited liability partnership (discussed below) which was designed for professional practices. Other partnership forms are the giant "publicly traded partnerships" (treated as C-corps for tax purposes) and limited liability limited partnerships (adopted in only a few states) which limit the liability of general partners (where two or more) as well as of limited partners.

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