Question

John and his brother James were operating a partnership firm. It was a successful venture with an annual turnover of $10 million. Both of them are married and have children. It is their long term plan to give their children and spouses some share in the business. However, they would like to retain the management powers of the firm. Recently some lucrative opportunity have opened up to them and they would require an additional capital injection of $10 million to capitalise on the opportunity.  They are willing to sell 20% of their business for the capital injection, as their accountant tells them that this opportunity will be able to increase their turnover to $50 million within the next 12 months. Advise John and James whether to continue their operation as a partnership? Would another type of structure be more appropriate for their plans? Explore all the types of options available to them and consider the advantages and disadvantages of the business structures proposed.

Answer 1

A partnership firm is one that is having two or more partners, to carry on business as co-owners, the profit and loss are shared by the partner in a proportion as per the agreement, it is a specific kind of legal relationship, The partners pay the taxes of the business in proportion to their share in profit/loss as per the agreement.

The two brothers are having a general partnership that means they are responsible for the day to day business transactions, which have liability as owners for debts and lawsuits, and they are managing the partnership.

The partnership firm of John and his brother James are already making an annual turnover of $10 million; they had planned to give shares in the business to their families. When the lucrative offer comes that can increase their turnover to $50 million within the next 12 months, they wanted to sell 20% of their business to make arrangement for an additional capital injection of $10 million.

The accountant has advised them that an additional capital injection of $10 million would increase their turnover.

As this the partnership, they both have to sell in equal proportion to make an arrangement for extra capital. Before pumping in the capital they should survey the market and look at the profit as well as loss aspect also, in case they fail to get the expected turnover. They should take the help of professional agencies to guide them and present the fact that putting in the capital in the new opportunity is viable or not, they should confirm that the offer that has come on their way is at par with the recent business or an entirely new venture.

Business is a game of risk if the brothers are sure that the new opportunity would indeed benefit them and they can handle the extra responsibility, and make profits, they can sell off the portion of the business as per their share agreement, but they have to be extra careful when parting with a running profitable business, because, business is risky there are many competitors in the markets, no one believes the others intention in business.

If the brothers are sure that they can make a profit with the new venture, in my opinion, they should give some shares to their spouses from the present business as per their plan, and from their part, they can sell off a portion and can go for the new venture.