Nancy Wesla and Jordon Dugger have been in a partnership for five years. The principal business of the partnership is systems design for financial institutions. Gross revenues have increased from $330,000 in 2016 to $3,800,000 in 2020, the year just ended. The number of employees has increased from two in the first year to nine in the most recent year. Wesla and Dugger realized that they had to build up the partnership’s capital and have withdrawn only part of the annual profits. As a result, their Capital accounts have increased from $200,000 (Wesla, $140,000; Dugger, $60,000) in 2010 to $2,000,000 (Wesla, $1,080,000; Dugger, $920,000) in 2020.

The two partners realize that they must expand their capital base to expand their operations in order to meet the increasing demand for their systems designs. At the same time, they wish to take personal advantage of the partnership’s earnings. They have been trying to determine whether they should continue the partnership and borrow the necessary funds, take on one or more partners (several of their employees have expressed interest and have capital to invest), or incorporate and sell a portion of the business to outsiders. With respect to incorporation, Faisal Jamal, a former classmate of Wesla’s who works for a stockbroker, has indicated he knows of investors who would be interested in buying a share of the business.

Required

Wesla and Dugger have come to you to ask for advice. Provide an analysis of the situation and make a recommendation. In response to your questions, they indicate they will need additional capital of $1,600,000 to $2,000,000.