Acme Homebuilders

Acme Homebuilders
Five friends wanted to open up a home building business together. Brian and Carrie both had management experience from their previous jobs at Campbell Soup, Inc. They were determined to apply this experience to the new business. Brian and Carrie both had excellent business sense, but they lacked experience in the construction business. Since the pair sold their Campbell's securities in 1998, when the stock was at an all-time high, they both acquired sizable assets.
Steve, Tom, and Sam did not have monetary assets to invest into the new venture. All three of them spent years working for various successful builders. Tom had the most experience; he headed the local division of a well-known national homebuilder, Toll Brothers, Inc. After working for Ryan Homes for the last seven years, Steve and Sam knew the home construction business very well.
Capital Issues
Even with all of the friends' collective savings, they still needed additional capital. They considered two options for obtaining the necessary funds. The first option was to secure financing from a local bank. The five friends believed that they could get a fair deal from the Willow Grove Bank because the bank president was Carrie's old college roommate. The business could take out a loan, or the five friends could try to secure a credit line from the bank. In any dealing with the bank, the five friends would all be required to put up personal collateral. Even though everyone was optimistic about the success of the business, the five friends were concerned about the liabilities. Brian and Carrie were especially concerned, since their current assets were substantial.
The other option was to find outside investors to secure additional funds. However, the problem with this option was that the outside investors might demand control in the day-to-day operations. The investors would not only share the financial risks, but also reap the financial rewards.
The five friends believed that the business would succeed. After many days of deliberation, the decision was made to proceed with the first option, the bank financing. The group concluded that the business' chance of success would increase if there were no interferences from outside investors. The five friends were willing to assume all of the risks, in order to enjoy all of the rewards.
Partnership Agreement
The group decided to form a general partnership. The name of the business chosen was Acme Homebuilders. The five partners employed an attorney to prepare the written partnership agreement. The articles of partnership stipulated the distribution of profits and losses based on percentage of investment and risk taken. The partners agreed that Brian and Carrie would each receive 35% of the profits generated by the business. Tom, Steve, and Sam would each be entitled to 10% of the profits.
The group also decided that all five partners would receive equal salaries. The partners agreed that Brian and Carrie would oversee the financing, marketing, and business management of the entire partnership. It was additionally resolved that Steve, Tom, and Sam would supervise the day-to-day operations of the building sites.
Within the articles of partnership, a buy and sell agreement was included. In case of dissolution by any of the partners, the five friends agreed that the remaining partners would buy out the existing shares at the current market value. In case of a death, the funds would be provided from a life insurance policy that was taken out on each of the five partners. The policy was made payable to the partnership.
Partnership's Advantages
It was easy to form the partnership, and the costs of forming the partnership were not significant, also. The partnership was less regulated than a corporation would have been. Since Acme Homebuilders was a start up, the partners incurred net losses in the first year of operations. Given that the partnership was not a tax paying entity, the five partners benefited from the pro-rate share of the losses. Since the losses were allocated to each partner, each partner's personal tax liability was reduced. The fact that the partnership could operate in multiple states without obtaining licenses was an advantage, since Acme Homebuilders was building mid-level and luxury homes in the tri-state suburban area.
Other Alternatives
The group considered forming a corporation. The five friends did not form a corporation since it would have been more costly to form and maintain. A corporation would have to pay fees in any state where business was done. In addition, corporate income could have been subject to double taxation once profits were generated. Moreover, the partnership did not need to have the formal articles of incorporation.
The group did not form a limited liability company (LLC) because, in their case, the advantages did not outweigh the disadvantages. LLC was considered for its benefits, specifically the limited liability for the members. However, the group's decision to provide a personal guarantee for the bank eliminated that positive benefit in the group's case. The five friends decided that it was not necessary to form ancillary businesses at the time, because they did not believe it was needed to split into multiple units. This may be considered in the future, as the Acme Homebuilders becomes more successful.



References
Corley R., & Reed, O.L., & Shedd, P. J., & Morehead, J. W. (1999).
The legal and regulatory environment of business(11th ed.)
New York: McGraw-Hill
Mallor, J. P., Barnes, A. J., Bowers, T., Phillips, M.J., & Langvardt, A.W.
(1998). Business law and the regulatory environment (10th ed.). United States of America: McGraw-Hill.