Capital for the formation of MSP will be contributed by the general partner (MSL) and the limited partners. Partnership interests will be calculated based on the percentage of capital contributed to the initial capitalization of the venture. The law requires the following:
Limited partners cannot purchase their partnership interests through contribution of services [Dible P. 180], but must contribute tangible assets. Management and operation of the company is solely the responsibility of the general partner (MSL). Violation of these rules either invalidates a partner's ownership share or exposes the limited partners to potentially unlimited risk in case of failure of the business, lawsuit, etc.
We do not want to select potential partners in this venture based on their bank balances, but rather their competence, willingness to work, and entrepreneurial orientation. However, we don't want to give away partnership interests or make participation a no-risk venture for any partner. The owners of MSL are basically risking everything they've made for the last 5 years on this venture; the amount of money we intend to contribute would let us lie on the beach for a long time, and we intend to make a lot more than we contributed to compensate us for the risk, the work, and the hard times ahead. We want to know that our partners in this venture have a stake in its success at least proportional to their ownership of the company.
The following plan is suggested for initial capitalization of the company: we will calculate the desired capitalization and the partnership shares of all partners. As noted above, partnership shares will be in direct proportion to contributions. Partners may purchase their shares either in cash, by a no-interest loan from MSL secured by equipment, or by a regular market-rate callable loan from MSL.
Here's how it works. Suppose a partner wants to buy in for $5000. The simplest thing is just to pay the $5000 in cash. Alternatively, since many partners will want to purchase machines for software development or already own them, they may use the money to buy a machine (getting the tax credit and depreciation benefits, which are incredibly attractive today), then pledge that machine as security on a zero-interest loan from MSL. Or, MSL can loan the partner the money on a regular unsecured loan at market interest rates, and that money can be used to buy a partnership share in the normal way. At, say, 20% you can ``rent'' $5000 for $1000 per year.
The idea of all this is that we recognize that a substantial portion of the initial capitalization is going to be used to buy machines for software development. Those partners who already own machines should not be forced to subsidize those who haven't, nor should those partners who obtain machines for MSP work be forced to forgo the tax benefits of buying the machine themselves. By loaning at no interest against the machine, we're allowing machine investments to be applied to partnership share dollar for dollar.
On all of these loans, it will be part of the agreement that revenues from a partner will first be applied to retiring any debts to MSL, and only then will the partner be paid directly.
Note that none of the above has been reviewed in detail for possible adverse tax consequences (in particular ``imputed interest'') and it's possible that there may be some more tax-attractive way to go at this involving leasing. Externally, this venture looks very much like a tax shelter, so the tax ground is very carefully covered and one must tread with caution in possibly questionable areas.
It should be clear that if MSL loans a partner the money to buy in, that loan should have an equal position in the recipient's mind with a home mortgage or auto loan. It is a real loan of real dollars which could have otherwise been spent by the principals of MSL on themselves. It is not ``funny money'' or a paper accounting transaction, and he who receives it should expect to pay it back, hopefully from revenues of the products MSP sells, but from other sources in the event MSP fails. Not only is this a realistic representation of what's really going on, it will hopefully inspire in all partners the kind of seriousness about this venture with which MSL approaches it.
If MSP fails, I will lose everything I've made for all the work I've done since 1977. I want partners who are willing to work as hard for success as I am.
Legally, limited partners have no say in the operation of the business. It is our intent that the business will be run as any other partnership based on partnership interests. Since I expect MSL to hold a controlling interest, this will probably make no practical difference. I believe that the people involved in this venture should be compatible enough that consensus will govern most actions taken by the partnership. This business can succeed only if all partners work to make it succeed. Since MSL has the most to lose, MSL has every reason to avoid contention and unhappiness among the rest of the partners.
Editor: John Walker