Brothers, Paul and John are thinking about a new entity structure for their business, which is located in Los Angeles, California. Their business venture involves the sale of surf wear—wetsuits, swimsuits, boardshorts, shirts, surf jackets, surf accessories, etc. Paul is your best friend and is seeking your “good counsel” on his business. He heard you recently enrolled in a business organizations class at a top 20 law school. You know that Paul is 50 years old, married with two children (a 20-year old son at college and a 16-year old daughter living at home). He has several degrees including an MBA. He has other business ventures, which makes him a “serial entrepreneur.” He invested $150,000 of his savings into the surf wear business venture. You also know that John was a professor at USC for many years before he took an early retirement. He is 60 years old, married, and has one daughter (age 25). While John was a professor at USC, he worked on a technology that can be used to alert surfers anytime a large wave was onset. He doesn’t have a contract with USC regarding the university’s rights to the technology but had spoken with his department chair about his idea for the new technology. He hopes to license his technology to the surf wear business. This will be his sole contribution. For the last 7 months, Paul and John have had an informal partnership. They have made $50,000 in net profit, and are thinking about bringing on their cousin, George, as an additional investor. George comes with years of sales experience. Paul has come to you with the following questions and concerns. Your responses to each of the following questions should be approximately one to two paragraphs. You should substantiate your responses by providing any appropriate references to the cases and model statutes that we are studying in our course; no outside references are required. You may feel free to incorporate additional facts and assumptions into the hypothetical scenario, as long as you clearly note them.
1. Paul and John formed a general partnership a year and half ago. They did not file any papers with the state or the county of Los Angeles and wonder if they should have submitted any formal filings. What should do they now? (They have a valid partnership agreement.)
2. Each partner roughly owns one-half of the business, and with George’s addition, each individual will have a one-third ownership interest. Should Paul agree to this ownership split? Why or why not? How will this impact his ability to make decisions for the partnership? In order for him to take out his money and invest it elsewhere, what does he need to do? The partnership’s assets are currently valued at $750,000.
3. Related to the partnership, Paul wants to understand whether it makes sense to continue as a partnership with George coming on as an additional investor. George will invest an amount equal to Paul. Are they required to amend the partnership agreement or prepare any other documentation to formalize this?
4. They also want to give George authority to enter into contracts exceeding $15,000 since he will be running point on company sales. How should they go about doing this?
5. They (Paul, John and George) are interested in converting the partnership into a corporation. What steps should they to take in order to successfully incorporate their business?
Prepare a brief letter (to be sent to Paul) addressing his concerns and proposing an entity structure that accounts for these concerns. In your letter, clearly identify the recommendation being made and the reasons supporting the recommendation.