Stephanie and her husband, Richard, intend to purchase an historic house, renovate it and then use it as a therapeutic massage clinic. To do this, they need $300,000 in financing in addition to using money from their personal savings. They expect the business to operate at a loss for the first two years. Until the clinic becomes profitable, Richard will continue to work as a full-time professor at the local university where he earns a substantial salary. Stephanie will work evenings and weekends in her existing landscaping business, which she runs as a sole proprietor.

Stephanie and Richard are concerned about protecting their other assets in the event the business should fail and the bank forecloses on their business loan. They would also like to minimize their current personal income taxes. Considering these objectives and the unproven nature of their business, what statement is true?

a) They should operate the business as a general partnership, so they can deduct the losses from their other sources of income during the business start-up years.

b) They should establish a 2-person limited liability partnership, so they can flow through the losses while protecting themselves from personal liability.

c) They should operate the business as a corporation because it will protect them from liability, even if the bank requires them to personally guarantee the loan.

d) They should operate the business as a corporation because they will be able to deduct the losses from their other sources of income and their personal assets will not be put at risk in the event of business failure.