Sam, Tom, and Joe want to start a small business. Joe will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Tom will be involved as an active consultant and manager and will also contribute funds. Sam and Tom are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

Question

Quizplus · Accepted Answer

A limited partnership would be the best choice for these individuals because it allows Joe to limit his liability to his initial investment while still being a silent partner, and Sam and Tom can be the general partners who are actively involved in the daily operations of the business and accept liability for the firm's debts. Additionally, all three individuals can share in the profits and the initial organizational costs can be kept to a minimum. A sole proprietorship would not offer Joe the limited liability he desires, and a general partnership would make all partners equally liable for the firm's debts. A joint stock company and a corporation would both require more complex organizational costs and legal structure.

Sam, Tom, and Joe Want to Start a Small Business