Richard Powers and Jane Keckley, two professionals in the finance area, have worked for Eberhart Leasing for a number of years. Eberhart Leasing is a company that leases high-tech medical equipment to hospitals. Richard and Jane have decided that, with their financial expertise, they might start their own company to provide consulting services to individuals interested in leasing equipment. One form of organization they are considering is a partnership.

If they start a partnership, each individual plans to contribute $50,000 in cash. In addition, Richard has a used IBM computer that originally cost $3,700, which he intends to invest in the partnership. The computer has a present market value of $1,500.

Although both Richard and Jane are financial wizards, they do not know a great deal about how a partnership operates. As a result, they have come to you for advice.

Instructions

With the class divided into groups, answer the following.

(a) What are the major disadvantages of starting a partnership?

(b) What type of document is needed for a partnership, and what should this document contain?

(c) Both Richard and Jane plan to work full-time in the new partnership. They believe that net income or net loss should be shared equally. However, they are wondering how they can provide compensation to Richard Powers for his additional investment of the computer. What would you tell them?

(d) Richard is not sure how the computer equipment should be reported on his tax return. What would you tell him?

(e) As indicated above, Richard and Jane have worked together for a number of years. Richard’s skills complement Jane’s and vice versa. If one of them dies, it will be very difficult for the other to maintain the business, not to mention the difficulty of paying the deceased partner’s estate for his or her partnership interest. What would you advise them to do?