Sam Able, Abby Moss, and Kendra McDonald have just graduated from the Toronto Culinary Institute and are excited about opening their own restaurant. The three want to open a trendy Thai restaurant in Toronto and have been busy looking for the perfect location. Sam, who completed several business management courses as part of his degree, has estimated that the three will require $600,000 at a minimum to start the business. This would provide cash for rent, equipment, supplies, and advertising, as well as small salaries for the three graduates until the restaurant is up and running.
Having recently graduated, none of the three has significant assets to invest in the venture. Sam’s parents are willing to loan them $75,000, but they want to see a solid business plan before committing to the loan. Sam and Abby are willing to work full-time in the business, but Kendra has a small child and feels that initially she may not be able to work full-time. Instead, she would be willing to work nights and weekends when her husband is home to take care of the baby.
The three friends recently had a meeting to discuss matters and try to decide on how to form the business. Sam has proposed that they incorporate, but the others are concerned about the additional cost of incorporation and wonder if it would not be better to operate as a partnership. They feel that they need additional information before making this decision and decide to ask you, an independent business consultant, for advice.
Required:
a. Prepare a report for the three friends outlining how operating as a partnership differs from incorporating. Be sure to include the advantages and disadvantages of each form of organization.
b. Based on the information available, make a preliminary recommendation to your clients about the form of organization that will best suit their needs.