Amin, Basu, and Cano are planning to open a flight training school in Tucson, Arizona, which they will own equally. Amin is the instructor and will largely run the operation. Amin intends to provide all his time, but no initial cash, to the venture. Amin's incentive is to use the flight time he accumulates to qualify for a commercial pilot's license. Basu is the technical engineer whose function will be to provide all the necessary aircraft maintenance. Basu intends to work only part time as she is currently taking classes at the University of Arizona. Both Amin and Basu will receive a salary. Cano will be a passive investor in the venture and does not intend to participate in the management or day-to-day operations unless things do not go well.

 

Cano is a very wealthy individual and, accordingly, has substantial passive income that she would like to eliminate or reduce with passive losses. Consequently, Cano has agreed to provide all funds necessary to purchase the aircraft and to defray the working capital needs of this venture provided that all losses generated by this venture be specially allocated to her. Additionally, Cano requires that no funds be distributed to Amin or Basu until she has recouped all of the money she has invested in the venture.

 

Under which legal form should the business operate? Which federal income tax status should it go with?