Characteristics of Small Business - Essay Example

Small Business Introduction This essay discusses a number of aspects of a small business based on an identified example of small business. To understand how small businesses operate, the essay describes the activities of the business, its legal ownership structure, other possible alternative structures, and the appropriateness of the business structure. Also discussed is the owner’s motive of starting vis-à-vis the objective of wealth maximization, and the key characteristics of the small business used as an example. 1. Activities of the business Chicken Curry Restaurant is an authentic Indian restaurant that serves traditional and contemporary Indian dishes. It is a small business that was started in 2013 by a businessman called Hani. Hani is a professional chef and has an extensive experience across Dubai, Egypt, and Australia, hence his decision to venture in the restaurant business. Chicken Curry Restaurant offers a wide array of delicious Indian dishes given that the business’s owner has been in the food and beverage industry for a long time and can easily make decisions about the type of food that customers want to be offered. 2. Legal ownership structure of the business The legal ownership of the restaurant is sole proprietorship. This classification is based on the fact that Hani owns the business and is personally responsible for its debts. In essence, sole proprietorship is the simplest form under which one can operate a business, and the owner can operate under his or her own name (Spadaccini, 2007, p. 4). In this case, Hani has chosen to operate under the name Chicken Curry Restaurant. Although the restaurant has a unique name, it does not create a legal entity separate from the owner as stated by (Spadaccini, 2007, p. 4). This means that as noted above, Hani remains personally responsible for debts incurred by the business. 3. Comparison of the structure with alternative possible structures Apart from sole proprietorship, other alternative possible ownership structures include partnerships, limited liability companies and corporations. A partnership means a business enterprise created by two or more people. Like sole proprietorships, partnership businesses are subject to unlimited personal liability for losses and debts of the business except in cases where the partnership is a limited partnership or a limited liability partnership (Spadaccini, 2007, p. 6). The next type of ownership structure is a limited liability company (LLC). This implies a hybrid business form in which the business organization offers the advantages of limited liability with the simplicity of a partnership. As the name suggests, an LLC offers liability protection to its owners for liabilities and debts (Spadaccini, 2007, p. 6). Finally, a corporation is a business entity that exists independently of its owners, who are referred to as shareholders. It is an organization that is regarded a business person in law, and thus the owners of the business are protected from personal liability for the business’s obligations and debts within certain limits. In addition, the corporation can file lawsuits, buy and sell property, enter into contracts, pay tax, and even commit crimes (Spadaccini, 2007, p. 10). 4. Is it the most appropriate structure? The current legal ownership structure of Chicken Curry Restaurant is appropriate but not necessarily the best. This is because Hani receives all earnings from the business, the business is easy to organize since Hani is a professional chef and he has complete control over the business as noted by Madura (2006, p. 160). Top of FormBottom of FormHani is also likely to pay lower taxes since the business is small. But the downside of the ownership structure is that Hani has to absorb all losses that the business may incur since the business has unlimited liability as stated by Madura (2006, p. 160). Hani may also have unlimited funds to invest in expanding the business unlike other forms of ownership such as partnership and corporation where additional funding can be sourced from other partners or shareholders (Madura, 2006, p. 160). In addition, Hani may have limited skills in running the business since he is a chef but the business requires other additional skills such as financial management and customer relationship management. 5(a) Owner’s personal motives Although I did not have access to Hani, I can speculate that his personal motive of starting the business is to use his experience as a chef to earn income from the restaurant business. This means that he aimed to use his acquired skills in order to earn from an area he understands best and also to maintain his profession as a chef in a personal business. According to Madura (2006, p. 160), many successful sole proprietors had previous work experience in the industry in which they are competing. In fact, the same author gives an example of restaurant managers who eventually establish their own restaurant – a case comparable to that of Chicken Curry Restaurant. 5(b) Motives versus objective of wealth maximization. The motivations identified above, i.e. to earn from doing business and to maintain the owner’s profession in a personal business can be compared with the objective of wealth maximization in different ways. First, the motivation to make money from the business goes hand-in-hand with wealth maximization since the wealth maximization model is premised on the assumption that the fundamental aim of a business is to maximize the wealth of its owner by maximizing the present value of long-term profits (Emmanuel, 2010, p. 15). Second, the desire to be a chef in personal business (in the context of the current case) could be motivated by the need for Hani to avoid unemployment after being laid off in a different restaurant; to be his own boss; or to gain independence. These additional motivations mean that people do not just start businesses because they want to maximize their wealth – they may have other reasons in addition to making profit from the business. But all in all, wealth maximization remains a crucial reason for starting a small business because of the desire to earn income from the business. 6. Key characteristics of small business There are five key characteristics of small business which I can identify in the chosen business: independent ownership and operations; close control by the owner, who also contributes most of the capital; principal decision making by the owner; lack of effective limited liability; and high integration of the owner’s and business affairs. This is because Hani owns and manages the business; he controls the business using his skills as a chef; he probably contributed all the capital with which he started the business; he makes his own decisions regarding the direction of the business; the business is subject to unlimited liability – meaning that he has to be responsible for whatever loss or debts it incurs; and because of the fact that he chose to open the business based on his experience as a professional chef. This makes him integrate his professional and personal skills into the business. References Emmanuel, M. (2010). Methodology of business studies. New Delhi: Pearson Education India Madura, J. (2006). Introduction to business (4th ed.). New York: Cengage Learning Spadaccini, M. (2007). Business structures: Forming a corporation, LLC, Partnership, or sole proprietorship. Irvine, CA: Entrepreneur Press. Read More