Business Formation - Coursework Example

Decision relating to Business Formation Dear Simon, Being your Business Affairs Manager, I find it a part of my responsibilities to advice you in the decision making process. In order to help you with the complicated and important decision regarding the expansion of the business I would like to draw your attention to certain facts which are discussed below. Background Information Businesses are formed with an aim to make profits and shareholders/owners’ wealth. Businesses require a considerable amount of capital in order to successfully establish and develop. The formation of businesses is based on the legal structures provided to the entrepreneurs to establish their businesses. The entrepreneurs are required to make judgments based on their knowledge, understanding and size of the business. A small business with less capital may be established as a sole proprietor rather than a partnership or a company. Similarly, a company with high capital requirements and extended future expected growth may be established as a company/corporation. The advantages and disadvantages related to each of these business forms should be given appropriate consideration before making a decision. These advantages and disadvantages are discussed below to aid your judgment in the decision making process regarding the types of business formation structures available. Sole Proprietorship Sole Proprietorship is a form of business which is usually preferred by single owners to manage their small-sized businesses. Sole proprietorship is a form whereby the whole authority of managing the daily activities of the business, its management and decision making is limited to the owner of the business. The owners, under sole proprietorship, are the sole holders of any gains or losses generated by the business. They are solely and entirely accountable for the liabilities and rightful holders of the assets that business owns. The legal phenomenon is that business and the owner are equal or the same when it comes to any charge against or for the business. The business’s liability may be termed as the liability of the owners. There are a number of benefits that sole proprietorship brings for the business and the owners. These advantages distinguish this form from other legal forms of businesses. The first and foremost advantage of this kind of a business is the least complex structure of the business. The simplicity of the structure keeps the costs of starting the business and managing it to the minimal. Hence, it may be termed as a cheaper way of establishing a business. Since sole proprietors are the owners of the business with full authority to make decisions and changes in the business, this form provides an autonomous position to the owners. They have the authority to change suppliers, the way activities are performed and even the proportion of income which is to be reinvested and so on without any external opposition or conflict. In simple words, we can say that this form brings an independent authority to the proprietors for strategic and managerial decision making without any disagreement from any other party. Moreover, the advantage of enjoying the business profits alone is yet another charm for the proprietors to go for this option (Boone & Kurtz 2008). They are free to reinvest the whole profit that business generates or withdraw it wholly without any need to justify their decisions. In addition to all these benefits, sole proprietorship is also beneficial when the business is required to be dissolved. The simple structure helps in uncomplicated closure of the business. Regardless of the benefits this form of business brings, the disadvantages must be kept in view when making a decision regarding the expansion of your business. The autonomy that sole proprietorship brings is accompanied with the risk of losing all business and personal assets in case of any liability against the business. The financing issues are also relevant in this regard as the sole proprietors are less likely to attract investors by showing the performance of their business. The loans and personal savings may not be enough to finance the expansion in case of business’s success. Sole proprietorship, hence, somehow limits the growth of the business due to unavailability of capital and finance (Mugambwa et al. 2007). Owner managed businesses are also less likely to attract employees with higher qualification and experience as such employees aim to work with large-sized and well-known listed organizations. Partnerships This is a legal form of a business which combines two or more proprietors as the legal owners of a business. This form also does not allow for the business as a separate legal entity and holds owners to be liable for the charges against the business. The partnership requires a legal agreement to be made and signed by the partners. This agreement sets out the basic terms of the partnership like the responsibilities of decision making, decisions about profit sharing, dispute resolution, and admittance of more partners during the course of the business and dissolution of partnership. The thought or decision relating to the dissolution of partnerships seem to be too remote to many partners, yet, the problem that they may encounter in case of any conflict calls for early definition of procedures to be followed in case of business’s closure. The contribution required on the part of each partner is also set out in the agreement to reduce the risks of conflicts later on. The benefits of partnerships should be highlighted to give a clearer picture of the possible relationship between you (Simon) and Matt. If we opt for this option, the partnership relationship is easier to be formed. The only time consuming part, in partnerships, is to carefully formulate the partnership agreement, which forms the basis of this relationship. The business’s running, daily activities and decision making are all dependent on the clauses agreed on the partnership agreement. Owing to the importance of this agreement, the terms mentioned in it should be carefully read and amended if required to reduce or eliminate the risk of conflicts and problems in the future. The fact that partnership requires more than one owner, the finance raising becomes easier for the business. The partners may contribute individually or in collaboration to aid the expansion of the business. Moreover, they may reinvest their share of profits for the expansion as well as contributing their personal savings. In addition, the business may benefit from the skills, qualification and experience of partners (Weygandt 2008). The business may choose to employ partners who are beneficial for the business and its management. The employees with experience and skill may become interested in this business to enjoy the benefits that entering in the partnership may bring to them. The disadvantages of partnerships are also significant. The most complex and difficult to manage disadvantage for the businesses and the partners is the liability of all partners for the actions of each other. The partners cannot simply deny any liability which has arisen due to the fault or wrong decision of any of the partners within the partnership relationship. Another disadvantage is contrary to the advantage of distributing the losses that business makes (Weygandt 2008). In simple words, the profits that business produces need to be shared with other partners. In our case, the partnership with Matt will require the generated profits to be distributed with Matt equally or in a proportion agreed in the partnership agreement. In addition, the decision making power is not bestowed on any single partner which may end up with conflicting views and decisions might be affected regarding the business. Matt, in our case, may refute any decisions made individually. Company Corporations are businesses which are registered in a name with the company’s registrar. Businesses acquire a separate legal entity status once they are incorporated. This provides a clear distinction between the business and its owners. The business’s assets, liabilities and equities are separate from the possessions and liabilities of its owners. A corporation gets a status of separate legal entity which allows it to enter into contractual relationships. The owners are generally termed as the shareholders and are responsible to appoint the board. The board consists of several directors who are responsible for the day to day running of the business. The shareholders are the owners but cannot acquire an executive status in the management of the company. The directors are responsible for the policies, strategies and decisions made in the course of running of the business. In addition, unlike partnerships and sole proprietorships, corporations do not dissolve in case of death of a shareholder or transfer of the ownership of a shareholder’s holding. The advantages that company formation brings clearly outweigh the disadvantages of incorporation. The owners or shareholders of corporations have a limited liability status which distinguishes between any personal liability of the shareholders and the liabilities of the company. Shareholders are, normally, not accountable for the liabilities of the company and their personal belonging are, hence, safe. Shareholders are only responsible for the liabilities to the extent of their shareholdings in the corporation. Corporations are at a greater benefit when they require raising funds. Corporations are of immense importance to the investors as they are registered, more responsible and profitable than any other form of business. Moreover, the company may sell out some of its stock in order to raise finance. Corporations bring the benefit of certain complex business structures which provide higher accountability of the staff to subordinates and directors. The companies are required by the law to perform statutory audit annually. This makes corporations more reliable and responsible. The systematic way of carrying out tasks and managing records with the annual auditing of the company, support long term success and growth of the business (Davidson 1993). The incorporation of businesses, however, is time consuming and expensive. If we compare it to the other forms like partnerships and sole proprietorship the legal requirements of incorporation are complex. Companies are required to follow the legal patterns of running, data management and annual submission of companies’ records to the company registrar. Companies are required to follow the rules and frameworks set up by the regulatory authorities, state and governmental organizations. Companies, as a result, are required to follow all those requirements and more systematic recording systems are required. Advice As for the scenario where Matt can clearly be a beneficial and helpful individual to support our business I recommend you to drop the idea of sole proprietorship. The two remaining options, partnership or incorporation rests with their relevant advantages and disadvantages. The advantages of incorporation are enormous and simply call for the adoption of this form of business. Incorporation brings many advantages with limited liability for shareholders at the core of its benefits. The main problem, however, may be the fact that shareholders/owners are not allowed to be a part of the executive team. In this regard, partnership may be beneficial for the success of the business whereby the business may benefit from the knowledge and skills of Matt. References BOONE, LOUIS E., & KURTZ, DAVID L. (2008).Contemporary Business 2009 Update Package. John Wiley & Sons Inc. MUGAMBWA, J. T., AMANKWAH, H. A., & HAYNES, C. E. P. (2007). Commercial and business organisations law in Papua New Guinea. London, Routledge-Cavendish. WEYGANDT, J. J. (2008). Hospitality financial accounting. Hoboken, N.J., John Wiley & Sons, Inc. DAVIDSON, R. L. (1992). The small business incorporation kit. New York, J. Wiley. Read More