Stephen Wadson and Mary Shively, two professionals in the finance area, have worked for Morrisen Leasing for a number of years. Morrisen Leasing is a company that leases high-tech medical equipment to hospitals. Stephen and Mary have decided that, with their financial expertise, they might start their own company to perform consulting services for individuals interested in leasing equipment. One form of organization they are considering is a partnership.
If they start a partnership, each individual plans to contribute $50,000 in cash. In addition, Stephen has a used IBM computer that originally cost $3,700, which he intends to invest in the partnership. The computer has a present fair value of $1,500.
Although both Stephen and Mary are financial wizards, they do not know a great deal about how a partnership operates. As a result, they have come to you for advice.
With the class divided into groups, answer the following.
(a) What are the major disadvantages of starting a partnership?
(b) What type of document is needed for a partnership, and what should this document contain?
(c) Both Stephen and Mary plan to work full-time in the new partnership. They believe that net income or net loss should be shared equally. However, they are wondering how they can provide compensation to Stephen Wadson for his additional investment of the computer. What would you tell them?
(d) Stephen is not sure how the computer equipment should be reported on his tax return. What would you tell him?
(e) As indicated above, Stephen and Mary have worked together for a number of years. Stephen’s skills complement Mary’s and vice versa. If one of them dies, it will be very difficult for the other to maintain the business, not to mention the difficulty of paying the deceased partner’s estate for his or her partnership interest. What would you advise them to do?