A new business venture requires $600,000 of equity capital from passive investors in addition to the $400,000 of capital that is being provided by the initiator of the project. The $600,000 will be raised by selling 30 units for $20,000 each. The 30 unit holders will participate in 60% of the venture’s profits.
It is anticipated that business operations will begin on October 1, 20X1.The entity will use a December 31 year end. Investors must contribute their funds on October 1, 20X1. The equity capital of $1,000,000 will be used as shown below.
Working capital ………………………………………… $ 200,000
Equipment………………………………………… 300,000
Start-up costs, staff training, and opening advertising…. 200,000
Operating losses:
20X1 (for the three-month period) ………………………… 250,000
20X2 …………………………………………………. 50,000
……………………………………………………….$1,000,000
The initiator is uncertain how to organize the new venture and is trying to decide between a separate corporation that will issue shares, and a limited partnership.
Required:
Which type of entity will make it easier for the initiator to raise the $600,000 of equity capital from passive investors? Explain, using a single investor as an example.