Should these two business people create a partnership or an LLC?
Abel and Baker form a partnership, with Abel contributing $200,000 in cash and other assets and Baker contributing $25,000 cash. Baker will be responsible for the day-to-day running of the company and working approximately 55 hours a week. Abel will work only 5 hours per week and be responsible for bringing in clients. The two are attempting to determine a formula for dividing partnership net income. Both believe they should receive about 70% of the net income; Abel because of his expertise and marketing contribution, Baker because of his asset contrtibution. How would you advise the partners in developing a methof for dividing income?
The main issue that is causing a problem between these partners will not go away, regardless of how they organize their business. Neither of these types of organization will decide for them how to split their money up.
That being the case, other factors will have to decide how they should organize. The most important of these is liability. In partnerships, it is generally not possible to participate in the daily operations of the business while still having limited liability for debts incurred by the firm. It is therefore more advantageous for them to form an LLC so they can both participate in the operation of the firm while still enjoying limitations on their liability.
They will also be able to distribute the income however they want. Again, though, they have to decide this between them and this will remain a problem even in an LLC.