Question

Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts since they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation.

A. Is Wally correct with his proposal that because they share control of the business and split profits equally, they will not have any personal liability for debts?

B. Is Wally correct that forming a corporation would likely result in double taxation?

C. What type(s) of arrangement, if any, would avoid double taxation and personal liability for Wally and Sally's endeavor?

Answer 1

A. When there is no agreement in the business, all the partners to the business are personally liable for any of the debts that arises during the conduct of such business.

In the given case Wally told Sally that because they share control of the business and split profits equally, they will not have any personal liability for debts is not tenable as when the properties of business are insufficient to pay the debts of the business then the private properties of the partners can be attached in absence of any valid agreement.

B. The claim made by the Wally that forming a Corporation will result in double taxation is not tenable as when the income is taxed during the computations of profit for corporation then such income is not taxable to the other shareholders.

C. Wally and Sally can enter into an agreement and make a Private Company or the company limited by the shares or Limited Liability partnership which will help them in avoiding the double taxation as well as attachment of personal assets in case of insufficient funds in the business.