advantages and disadvantages of a partnership

Here is the transcript of the video. Read and answer the questions below!

>> Hello, Dr. Kain [assumed spelling] back with you again. As we’re cruising through the [inaudible] theory, process and practice book, you’ve probably now run across the chapter on some of the legal aspects that affect entrepreneurship. In that chapter, we talked a lot about the different legal forms of organization. I’d like to share with you a story that I think encompasses some of that with the Harlow family. They were in the motel business. And let me show you some of the insights about how they’ve gone through their processes. The Harlow family opened up their very first motel in 2002. Initially business was very slow. It took almost 11 months to break even. But after about 3 years, the Harlows felt that the operation was then going to be a success so they stuck with that. And by 2007, they were able to increase the size of the motel from 28 to 50 rooms. They then expanded again in 2009. This time to 100 rooms. In each case the motel’s occupancy rate was so high that the Harlows had to turn people away during the months of April to September. And the occupancy rate was 85 percent during the other months. By industry standards, their business was one of the most successful motels in the country. As they entered the 2010 decade, Harold and Becky Harlow decided that rather than expanding more, they would be better off buying another motel, perhaps at a nearby locale. They chose to hire someone to run their current operation and they spent most of their time at the new location until they had it running properly. In 2014, they made their purchase. Like their first motel, the second location was an overwhelming success within a few years. For now, the Harlows bought a number of new motels. And as we can see by 2017, they had 7 motels with an average of 100 rooms per unit. During all of this time that Becky and Harold kept their own financial records, bringing in the certified public accountants, ACPA, only once a year to close the books and prepare their income tax returns. Last week, a very new accountant asked them how long they intended to keep running the 7 motels. The Harlows told them that they enjoyed the operation and hoped to keep it for another 10 years when they then planned to maybe sell out or retire. Harold admitted that trying to keep all of the motels going at the same time was difficult. But noted that he had some excellent managers working for him. They now asked him whether he would consider incorporating. If you incorporate, he said, you could sell stock and use the money to buy more motels. Additionally, you could keep some of the stock for yourself so you could maintain control of the operation. Sell some for expansion purposes and sell the rest to raise money you could put aside in a savings account or some conservative investment. That way if things go bad, you will still have a nest egg built up. The accountant also explained to Harold and Becky that as a partnership, they currently are responsible for all the business debts. With a corporation, they would have limited liability. That is, if the corporation failed, the creditors could not sue them for their personal assets. In this way, their assets would be protected. So the money Harold would get for selling his stock would be safely tucked away. The Harlows admitted they had never really considered another form of organization. Because as a married couple, they felt the partnership was just fine. They just assumed that a partnership was simply the best form for them. Now, they’re willing to examine the benefits of a corporation and they will go ahead and incorporate their business if this approach promises them greater advantages. So as the Harlows ponder it, I would ask you to ponder the similar questions. What are the advantages and disadvantages of a partnership? We talked about it in the chapter. What do the Harlows face from the standpoint of some of those disadvantages?

1. What are the advantages and disadvantages of a partnership?

2. Contrast the advantages and disadvantages of a partnership with those of a corporation.

3.Provide your opinion on whether the Harlows should incorporate.

4.Would the LLC option be a value to them? Explain.

 

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