Assume the same facts as in Problem 2-57.
a. Given the nursery’s operating prospects, what business forms might Paula and Mary consider and why?
b. In light of their proposed use of debt and equity, how might Paula and Mary structure a partnership to achieve their various business and investment objectives?
In problem 2-57 Paula Green owns and operates the Green Thumb Nursery as a sole proprietorship. The business has total assets with a $260,000 adjusted basis and a $500,000 FMV. Paula wants to expand into the landscaping business. She views this expansion as risky and therefore wants to incorporate so as not to put her personal assets at risk. Her friend, Mary Brown, is willing to invest $250,000 in the enterprise.
Although Green Thumb has earned approximately $55,000 per year, Paula and Mary expect that, when the landscaping business is launched, the new corporation will incur annual losses of $50,000 for the next two years. They expect profits of at least $80,000 annually, beginning in the third year. Paula and Mary earn approximately $50,000 from other sources.