Risks and Legislations in Dressmaking Business - Case Study Example

Name Tutor Course Date Business Risks and Financing Introduction The process of starting a business is usually affected by various factors, the main one being capital. Capital is the amount of money required to start a business. The unavailability of capital greatly affects the establishment of most businesses. However, various sources of capital are in place and can be used when starting a business. Personal saving and loans are the most popular sources of capital for most of the businesses. The type of business is also an important factor that determines the appropriate sources of capital that may be used. A sole proprietorship refers to a single owned business, and it is usually common when and individual starts their own business (Steingold, 12). The individual, in this case, is responsible for raising the capital and will also be responsible for the repayment of a loan in case they take a loan. The partnership is also one of the most popular forms of business, and it involves more than two individuals coming up together to form a business. In a partnership business, the partners are responsible for the payment of the loans as well as raising the capital. The profits and losses are usually shared among the partners. When forming a business, risk has to be considered as every business is prone to risks that may affect its operations. The paper discuses the aspects of risks and legislations in relation a dressmaking business that Mrs. Needle and her four friends intend to set up. Discussion Form of business The business between the Mrs. Needle and her four friends will be a partnership business. In a partnership form of business, the members may be required to contribute towards the capital. The amount contributed in the business may differ from one partner to the other. However, the partner that contributes the highest amount becomes the major shareholder in the company. In a partnership business, the partners have to share the profits and the losses (Craig & David, 7). This depends on the amount of share that each of the partners may have. Mrs. Needle and her four friends have to understand fully how the partnership form of business works. This is for the purposes of ensuring that they avoid any potential problems or risks that may arise. On the other hand, Mrs. Needle and her four friends have to discuses and agree on the roles that each of the members will play in the business. As the business is still new, Mrs. Needle and her four friends may not require any employee who is an indication that they will be required to carry out their business activities on their own. The business should ensure that it fully utilizes the skills of each of the members for the purposes of enhancing its growth and development. A partnership form of business has its advantages as well as disadvantages that need to be understood by Mrs. Needle and her four partners. A partnership agreement has to be developed for the purposes of governing the business operations. Sources of capital A number of sources of capital are available for Mrs. Needle and her friends for the partnership business. Personal savings is one of the sources of capital that can be explored by Mrs. Needle and her four friends. Personal saving is the primary source of capital for any business regardless of its form (Bento &Lourdes, 36). The funds obtained from the personal savings can be used by the business for carrying out the minor renovations of the building so as to suit the needs of the business. This is considering that the shop unit that will be used for the business is currently being used as mobile phone shop. Refurbishing the shop unit is also part of the plan of the business. The process of refurbishing the shop unit may also be expensive and hence the need for the capital. The partnership agreement should also be used for the purposes of determining the amount that each of the partners should contribute. Since Mrs. Needle is the founder of the business, she has to contribute more from the personal savings so as to become the major shareholder in the business. In a partnership business, the contribution of the members to the capital determines the number of shares that the member holds the organization. However, in the event that they decide to become equal partners in the business, and then each of the partners will be required to contribute the same amount. A higher amount may be raised when each of the members contributes and hence the advantage of a partnership business. The contributions from the personal savings may not be enough for the business as a purchase of stock will still be required. Approach a bank or financial institution for a small business loan is also an important source of capital that can be utilized by the business. However, before approaching a bank for the loan, it is important for Mrs. Needle and her four friends to set up an account for the business. The banks usually offer the loans easily to the businesses that already have an existing bank account. It is essential for the businesses to deposit their personal savings to the account to improve their chances of getting a higher amount. Most of the banks usually consider the financial status of the business in order to provide the loans (Newhall & Paul, 43). It is because of this most of the banks are reluctant to offer to loans to some of the businesses. The amount obtained from the bank loan can be used for the purpose of purchasing the stock and other business requirements. It is also important for the partnership agreement to clearly outline how the bank loan will be repaid. This is considering that all the partners are responsible for the repayment of a loan in a partnership business. The percentage of responsibility can be used for the purposes of determining the percentage of the amount the member will be required to provide in order to repay the loan. If Mrs. Needle is to be the major shareholder of the business, she may be required to pay more. A business line of credit can be applied by the business in order to obtain more finances for the business. The small businesses are usually eligible for obtaining a line of credit. The repayment option for the line of credit is the same as that of the bank loans. The line of credit may not offer a lump sum amount of money as compared to the bank loans. A line of credit only allows the business to access the amount of money required for funding different activities (Ji & Sherman 53). The line of credit can, therefore, be used by the business for the purposes of obtaining the funds to finance the buy additional stock. It can also be used for emergency purposes by the company. The line of credit can also be useful in terms of ensuring that the company can obtain the required finances within a short period. Mrs. Needle and her four friends should however ensure that they have obtained all the information with regards to the process and eligibility for the line credit. The business should also ensure that a business has an agreement that is in place that will guide the process of repayment. This is considering that the repayment period may not be the same as that of the bank. Depending on the amount, the line credit may require a shorter time for the repayment to be made. Since Mrs. Needle was working on her own in the dressmaking business, the partnership will lead to the expansion of the business. The expansion of the business means that more effective equipment will be required for the purposes of carrying out different business activities. Some of the machinery, equipment or tools will no longer be required by Mrs. Needle and her four friends. Such machinery, equipment and tools can be sold for the purposes of financing part of the capital requirement of the business. The sale of assets is an important source of capital for most of the businesses (Koe & Izaidin, 288). However, it is important for Mrs. Needle and her friends to come up with a list of the items that they need to dispose. This will play an important role in ensuring that they know the amount that they may obtain from the sale of the items. This method may not be able to raise a high amount of money. This is considering that most of the items that they may need to dispose may have undergone depreciation and hence impacting negatively on their value. The amount raised from the sale of the items that will no longer be required may be used with an aim of carrying out minor activities. It is also important to note that the business should consider carefully the items that needs to be sold as some of the items may still be used in future for the purposes of carrying out different tasks. Relevant legislations Since the business will be a partnership form of business, it will be required to comply with various legislations. All the business operating under the partnership for has to comply with the provisions of the Companies Act 2006 as well as the Partnership Act 1890. Unlike the past where Mrs. Needle was operation on her own, the business will have to comply with more legislation. The compliance with the legislations will play an important role in ensuring that the legal problems are avoided. The company will have to comply with the taxation laws. Every business has to pay taxes in the United Kingdom. An income tax will be remitted by the business depending on the profits and revenue that they can generate (Stenkula, 83). Any default in terms of the taxes will impact negatively on the business. The default in taxation may lead to penalties and closure of the business. The business may also be required to pay capital gain tax. The capital gain tax has to be paid when an asset increases its value after purchase and it is sold at a profit. Mrs. Needle and her four friends therefore need to fully understand the concepts of taxation so as to ensure full compliance with the legislations. On the other hand, it is also important to note that the business will be required to register as a partnership business since it has more than one individual. The compliance with the legislations will be part of the business and Mrs. Needle and her four friends have to ensure that they are aware of any new legislation in the course of operating the business. The business will be required to report its performance of HRMC and the bank in case it takes a loan from the bank (Callison & Maureen, 12). It is therefore important to note that the reporting of performance to HRMC is mandatory. The company also needs to assure the bank that the business is thriving in case it makes the decision of taking the bank loan. The legislations do not necessarily require the business to have a written agreement that guides the operations of the businesses. However, it is important for the business to draw up an agreement that is legally binding to make sure that each business partners is held accountable. The business may also suffer greatly in case of disagreements among the members and hence the need for a legally binding agreement. According to the Partnership Act 1890, the partners are jointly and severally liable for the operations of the business. Mrs. Needle and her four friends who will form the partnership must therefore ensure that they carry out their activities jointly to avoid any liabilities. This is considering that the business will be liable for the actions of any of the member which may affect the operations of the whole business. This is quite different from the past where Mrs. Needle was operating on her own. Possible risks Unlike the past where Mrs. Needle was operating on her own, the risks may increase due to the partnership. All the members will individually be jointly liable for the business. This means that if one of the members does not pay their required amounts for the loan the other members will be required to pay for the loan. This is unlike the past where Mrs. Needle was operation on her own and would deal with her own financial issues. If one of the members incurs a debt for the company, all the other partners will be liable for the debt. This risk is quite high when dealing with the business partners as each of the partner may have their own ways of carrying out different activities. The business also faces a risk if one of the members does not meet the needs of the customers. The company will be required to compensate the customers in case it fails to meet their requirements in terms of the dressmaking process. The partnership business is quite complicated and a lot of decisions have to be made. Misunderstandings are common when it comes to the partnership businesses due to the differences between the members (Smith, 34). This means that there is a risk of Mrs. Needle ending up with a lot of misunderstandings with her friends which may also affect their friendship. This is unlike the past when Mrs. Needle was working on her own. The risk of disagreements and friction among the partners is quite high when it comes to the partnership business. The disagreements and frictions among the partners may be due to various factors such as the sharing of responsibilities or profits. It is for this reason that an agreement though not necessarily required id important in a partnership business. Each of the partners in a partnership business is an agent of the partnership and is therefore considered liable for the actions of the other partners (Hynes & Mark, 31). This is an indication that Mrs. Needle and the other partners will be liable for the action of any of the members. This may also contribute to the disagreements and frictions among the members. This is unlike the past when where Mrs. Needle was operating on her own and was only liable for her own actions. A lot of understanding and unity is required in order for the partnership to be successful. In case one of the partners decides to leave the business, it will be quite costly to the organization. This is considering that a valuation of all the partnership assets has to be carried out. Mrs. Needle will not be in full control of the business unlike the past as the decisions have to be discussed among the members. Serious disagreements may arise among the partners which has the potential of leading to the collapse of the business. The business therefore faces collapse in case the partners are unable to agree on various key issues. Recommendations It is recommended that Mrs. Needle should consider the various sources of finances for the purposes of obtaining the capital. The primary source of finances for the business should be the personal saving. Each of the members has to make a certain amount of contribution toward the capital for the business. It is recommended that a legally binding agreement should be made so as to ensure that the shares of the members are in accordance with their contributions. The profits of the company should also be shared in accordance with the contributions of the members in terms of the capital. It is also recommended that the business should consider obtaining more finances from the bank. A short term loan should be obtained by the business so as to ensure that it is repaid after two years. It is also recommended that the members should agree on how much each of the members should contribute towards the repayment of the bank loan. It is recommended that the business should consult a legal expert from time to time for the purposes of ensuring that the company is fully compliant with the legal requirements. This is for the purposes of ensuring that the business is not faced with any legal problems. The business partners should also consult each other from time to time in order to avoid the misunderstandings that may be caused as a result of frictions among the partners. It is also recommended that each of the partner fully understand their roles so as to avoid liabilities for the company. Conclusion In conclusion, it is evident that the form of business that Mrs. Needle and her four friends will be involved in is a partnership business. This is considering that it has more than two members. It is also evident that Mrs. Needle will face a lot of changes in the partnership form of business as compared to her previous business which she was operating on her own. It is also apparent that there are various means that the business can use for the purposes of obtaining the capital. The loan from a bank as well as the personal contributions is the most reliable means that the business can use to obtain the loans. It is also evident that the business will be required to comply with several legislations which govern the operations of a partnership business. It is also evident that there a lot of possible risks in the partnership business. The partners will be required to pay for any of the debts incurred by a partner for the business. Misunderstandings may may occur in the course of running the business. Works Cited Callison, J. William, and Maureen A. Sullivan. Partnership Law and Practice: General and Limited Partnerships. West, 2012. Steingold, Fred S. Legal guide for starting & running a small business. Nolo, 2013. Craig, Tom, and David Campbell. Organisations and the Business Environment. Routledge, 2012. Bento, Alberto M., and Lourdes F. White. "Organizational form, performance and information costs in small businesses." Journal of Applied Business Research (JABR) 17.4 (2011). Stenkula, Mikael. "Taxation and entrepreneurship in a welfare state." Small Business Economics 39.1 (2012): 77-97. Newhall, Ashley, and Paul Goeringer. "Using a Business Organization Structure to Limit Your Farm’s Liability." (2015). Ji, HoJun, and Sherman D. Hanna. "Factors related to the financial vulnerability of small business owner-manager households." Journal of Personal Finance 11.1 (2012): 49-77. 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