Question: You and four of your closest friends have decided to
You and four of your closest friends have decided to start a business that will purchase from banks and other financial institutions high-risk, subprime mortgage loans that are in default. You believe that you will be able to purchase the loans for no more than 40 percent of their face value. The plan is that the business will buy the loans by paying half the purchase amount in cash and the other half by issuing promissory notes due in six months to two years. You expect to turn a profit by restructuring the loans with the debtors, foreclosing against the real property securing the loans, or aggregating the loans and reselling them. You and your four friends are willing to invest $2 million each in the business. Needing an additional $10 million to start the venture, you and your four friends agree to allow 10 other investors to contribute equity of $1 million each to the business. Only you and the four friends will be the managers of the business. The five of you want to share equally all decisions regarding the acquisition, management, and sale of the loans. You want the other 10 investors to be passive investors only with no say in the management of the business. However, the 10 other investors, who are contributing half the equity of the business, are concerned about protecting their investments. You have proposed that the business be formed as a limited liability company (LLC), but some of your friends believe that the corporation or the limited partnership is a better form. One friend says that the advantages of the corporation make it a superior business form. List the usual advantages of the corporate form of business. Explain why some of the usual advantages of the corporation are not likely to be fully available in this context.
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