Comparing Sole Proprietorship With Partnership, Corporations and Co-Operatives - Assignment Example

Sole proprietorship 1) Description of the activities of the business This business is a service providing type of business, dealing with the buying and selling of cosmetics. The business that is owned by a single businessperson was established in 1990. The businessman purchases products directly from the manufacture meaning that the products he receives are cheaper because the manufacture sells them at a cheaper price because of economies of scale. The products are collected from the main source using the owner’s means of transport. Immediately these products arrive at the shop, the owner takes a record of the new stock and combines with the old stock in order to have a clear figure of the present stock and a good flow of the products. The owner also determines the price of new stock and incorporates these information to accounting records. ----------------------------------------------------------------------------------------- 2) This business is under the sole proprietorship structure (Holmes, et al, 2002). It is classified under this structure because, being a small business, it is legally considered to be an expansion of the owner, this means that the owner is responsible over the business affairs for instance the liabilities and the debts (Jensen & Meckling, 1976). As this business deals with the service of selling cosmetics, the owner must keep a record of every transaction and be accountable especially on the financial statements. Since he is operating the business singly, he enjoys all the profit and caters for the loss. He runs the business as he wishes without any regulations because he is the boss. ------------------------------------------------------------------------------------------------------------- 3) Comparing sole proprietorship with partnership, corporations and co-operatives Categories Partnerships Sole proprietorships corporations Co-operatives Number of owners 1.they are owned by two or more people but not more than twenty Ownership is by one person Owned by shareholders and therefore no limit on number (Jensen & Meckling, 1976) Owned by five members and they there is no limit on number Responsibility and legality 2. they exist as legal persons and therefore have capacity to enter into contracts sue and be sued as a legal person (Holmes, et al, 2002) They are not legal persons created by the law (Holmes, et al, 2002) They are legal persons and therefore can enter into contract , sued and be sued in their own names They are legal persons created by the law and can enter into contracts in its own name, can be sued and can sue Liability 3. they have limited partnerships partners enjoy limited liabilities while general partnerships partner have unlimited liability They have unlimited liability They have limited liability (Holmes, et al, 2002) Have limited liability Managerial approach and capabilities 4. decision making is easy because consensus among the partners is enough to carry a decision Decision making is easy because only one person is required (Holmes, et al, 2002) Decisions are made in consultation with the shareholder thus making the decision making process to be long Member need to be informed of every decision made because some require their participation for example voting 4) justification of sole proprietorship The sole proprietorship encounters many advantages as compared to other structures for instance (James, et al, 2000) Starting and administering the business is not difficult and expensive, for example, in most regions if you decide on this form of structure and run it under your name, you are not required to register the business. There is no taxation apart from the fee paid once per year for acquiring the business license (Holmes, et al, 2002). The owner is the boss and therefore he runs the business at a free will without rules or regulations. Decision-making is easy and flexible as compared to partnership. There is no sharing of the profit gained (Jensen & Meckling, 1976). Since the owner is accountable for all activities, business information can be stored confidentially. The owner is in a position of hiring maximum or minimum number of employees or independent contractors, this is because the law makes no dissimilarity between the owner and the business, the owner is not considered as an employee (Jensen & Meckling, 1976). ------------------------------------------------------------------------------------------------- 5. (A) motivation for small business The business is not expensive to start, this means that, every person willing to run a small business can commence with little finances. The business is easy and less complicated to operate, that is, it does not require a hierarchy of management or memorandum governing its affairs. The owner enjoys ruling the business activities by himself; this makes him to be more dedicated and accountable. Dealing with cosmetics- non-perishable products-encourages the owner to be at ease because such products take longer period to expire. The owner is the one who gives final decisions; if the proposed decisions are not positive according to him, he has the authority to cancel such decisions and implement his own. b) Importance of wealth maximization to small business owners: Small business people are always motivated by profit increase but objectives of wealth maximization main task aims at increasing market share and other business aspects, which in return caters for the profit (James, et al, 2000). After an achievement of profit by business owners, the gain can be negatively utilized and may not assist in making wealth but with wealth maximization, more wealth is attained together with profit. Most small businesses are now focusing on wealth maximization instead of profit maximization due to the fact that, it provides a lengthy term horizon for evaluation, creating way for sustainable business performances (Holmes, et al, 2002). As profit is not the only necessary objective, wealth maximization centres on a range of other aspects such as getting hold of more market share, increasing the quantity of sales and many more, which will later take care of profitability. In wealth maximization greater importance is cantered to cash flow instead of profit, therefore to asses various options for making decisions, cash flow are given the highest consideration (Holmes, et al, 2002). This is of great importance for it measures the worth of a given project by use of discounting techniques. It can be used for business investment and guarantee security. 6) Key characteristics of small business Small businesses are independent, this means that they operate and manage their business affairs under their own set rules and regulation with less concentration on government matters. Small business employers are dedicated and motivated by profit gain, since they are the main managers they are forced to show a good picture of commitment and interest to their work. They are always proud even over small gain (Jensen & Meckling, 1976). Most of the small businesses are firm and flexible; this is as a result of the ease to make decisions without the presence of majority. The owners are very responsible and accountable for the business liability; this allows them to be careful on every transaction they intend to make. Reference James, S.A., Rebel, A.C. and James, W.L. 2000, ‘Agency Costs and Ownership Structure’, The Journal of Finance, vol. 55, no. 1, pp. 81-106. Holmes, S., Hutchinson, P., Forsaith, D., Gibson, B., & McMahon, R. 2002, ‘Small Enterprise Finance’, John Wiley, Brisbane, Chapter 1, Chapter 2, Chapter 3, Chapter 4, Chapter 6 and Chapter 7 and Chapter 8. Jensen, M.C. & Meckling, W.H. 1976, ‘Theory of the firm: Managerial Behaviour, Agency Costs and Ownership Structure’, The Journal of Financial Economics, vol 3, pp. 305-360. Read More