Question

Two friends, Mary and Bob and Bob’s brother James who lives in Australia, and Mary’s
sister Tania lives in UK are interested in purchasing a 3 hectare block of farm land which is
in a rundown condition with the idea of starting a business of growing herbs for supply to
food manufacturers and distributors. The block of land will cost $200,000. Mary and Bob
will contribute $20,000, each towards the purchase price and will hence have 10% ownership
each in the partnership. James and Tania will each contribute $80,000 and their share in the
partnership will be 40% each.
They have approached an agricultural advisor for a feasibility study and the cash flow from
the venture is estimated as follows:

Year ending	Income	Deductions (Interest, rates and other expenses)
31/3/2020	8,000	20,000
31/3/2021	16,000	30,000
31/3/2022	20,000	36,000

Required:
Mary, Bob, James and Tania have asked you for advice on which type of entity structure
(ordinary company, Look through company, general partnership, limited partnership, trust)
they should set up that will allow Bob and Mary to participate and access losses and take
more persons in future if more capital is required. Explain to them what the best entity
structure would be to choose from the 5 they have asked advice on.
Note: Your advise should be based on comparative analysis of all entities structures

Answer 1

Mary, Bob, James and Tania should opt for LLP in my opinion.
This is because of the following:

1. LLP will allow all the four partners to participate in profits and access losses in limited manner i.e., to the extent of capital contributed by them. Also it is easy to take more persons as partner in case of higher investment is required.

2. General Partnership is not advisable as liability in that case becomes unlimited for all the partners.

3. Since the objective of the concern is to start a business of growing herbs for supply to food manufacturers and distributors., so trust is not preferable.

4. Incorporation of company is also suggested but same involves lot of compliances of law, also profits shall be distributed in the form of Dividend to all the shareholders.