Issues in Small Business Management - Example

ISSUES IN SMALL BUSINESS MANAGAMENT (MAN 15) UNI OF SA (OPEN UNIVERSITIES) STUDY PERIOD 3, ASSIGNMENT 2 TROY SELWOOD STUDENT # 110108228 According to the ABS catalogue 8161.0.55.001, approximately 50% of the Australian small businesses are companies, where 14% belong to sole traders and 16% of them are partnerships. In the general category of both small and large businesses, ABS catalogue 8165.0 states that 32.9% of them are Companies, 29.2% are Sole Proprietors, 21.8% are Trusts and 16.0% are Partnerships. (Anon, Australian Bureau of Statistics Business Register, Counts of Businesses - Summary Tables). A majority of small businesses consist of individual owners or in partnership form due to the freedom that comes with it. This gives individuals room to work how they wish without having a manager directing them. Ambitiousness may be another reason to start up a small business in this form. Individual entrepreneurs, or a group of business minded people, may come up with an income generating idea that they want to explore further and turn that idea into a commercial success. It must be highlighted that individually owned businesses and those formed through partnerships have pros, and cons. (Linda Kirk Fox (1992) Business ownership. Moscow Page 2) Individually owned small businesses have a number of benefits. These are highlighted below: Owners will enjoy all the operating profits and returns which they can then choose to invest or spend however they wish. As highlighted earlier, most traders also start small businesses individually for freedom of employment. Additionally individually run small businesses provide owners with the freedom of movement. The owner of the business can manage his/her time to suit both themselves and the business. The business owner can make business decisions or changes at any time without restriction. Many small businesses can be started on a remarkably low budget and may be on a part time or casual basis around other commitments. Unlike larger companies or organisations, small businesses can be started on very small equity or personal investment from the owner. This allows business ideas be brought to reality much quicker. An individual owner enjoys capital gains exclusion (Linda Kirk Fox (1992) Business ownership. Moscow, Page 2) When compared to an individually run small business, a partnership comes along with a few extra restrictions. All profits (or losses for that matter) made through the partnerships become communal between owners. Business decisions cannot be made by only one member/owner of the partnership and hence should always be discussed. Therefore, all matters that affect the company owned by the partners usually involve having all the member part of the decision making process and also the solution (Anon. (2012) Forms of Business organization). When compared to partnership, an individually owned business gives more freedom to the owner to do according to his or her will (and to instantly back their judgements). The only consultation needed would be sorting legal advice if needed. In this case, the owner seeks the advice of a lawyer who advises him/her accordingly (Linda Kirk Fox (1992) Business ownership. Moscow, Page 1). Partnership based businesses tend to be long term, trustworthy friends (or associates) who share a common business goal. The formation of partnerships involves outlining the different benefits that may be enjoyed by each partner if the partners’ contributions are not equal. In most cases, members of a partnership have complementary attributes needed to make the business goals and objectives achievable (Joseph Miller (2009) Business Models). For example, there could be a young entrepreneurial thinker who needs financial backing for their business idea. This entrepreneur may end up teaming up with a wealthy individual backer to form the partnership. There may also be the opportunity for a marketer to be involved in the company to publicize and make the sale of the product or service possible. A major benefit of partnerships is the fact that they can lead to the formation of a big company from scratch. In the above example, the partners given in the above illustration may then end up outlining their shares of the company if it were to be successful and expand (Linda Kirk Fox (1992) Business ownership. Moscow, Page 1 and 2) When compared to individually run businesses, cost sharing through partnerships may be one element that makes starting a small business easier, however that is as far as it goes. Once a business becomes well established then different interests and motives in the partnership begin to emerge. These interests don’t emerge until later because by building the business from scratch, the purpose is usually (Linda Kirk Fox (1992) Business ownership). The common purpose mostly revolves around lifting it up to successful operating levels and surpassing breakeven point for revenue. Thereafter comes what each partner wished to gain from the successful business/company built from the partnership. In some circumstances, partners may end up becoming greedy by seeking a bigger share than agreed. This has potential to strain relationships within the company and create unhealthy divisions. In successful partnerships, all details pertaining to the partnership undergo thorough documentation. Many go to the point of having lawyers for legal advice on how to carry out the partnership According to the catalogue 8165.0 of the ABS, companies make up the majority of all businesses within Australia (Anon. (2005) 8161.0.55.001 - Australian Bureau of Statistics Business Register, Counts of Businesses - Summary Tables). This may due to the fact that most other forms of businesses eventually evolve into companies with time and sustained financial success. These profits may then be used to invest back into the small business to expand and grow from strength to strength. Partnerships may also evolve to companies this way or become a larger company all at once. Other than the evolution of small businesses into companies, the factor that make company business structure the majority in Australia, may already exist and established companies in the market. As small businesses and partnerships become companies, these older companies also continue to exist. This leads to the steady increase of companies structures as a whole. This steady increase of companies is coinciding with the varying number of small businesses and partnerships (Linda Kirk Fox (1992) Business ownership. Moscow Page 2) Sole proprietors form the second largest number of businesses primarily due to the freedom that comes with them. 38% of all small businesses indicated that they left their jobs in order to have freedom (Anon. (2005) 8161.0.55.001 - Australian Bureau of Statistics Business Register, Counts of Businesses - Summary Tables). This factor makes sole proprietorship to be the most popular of all types of businesses (Linda Kirk Fox (1992) Business ownership. Moscow, Page 2). Freedom does not only come through movement – sole proprietors enjoy other certain forms of existing business freedom. This includes no restrictions as to the amount of capital being input in the business. As mentioned earlier, all the profits belong to the owner. However, these types of businesses have commonly opened themselves up to bankruptcy as investment and risk is not diversified as much. There may be not enough liquid assets available to help the company get through tough times. Very often, a sole proprietorship suffers from significant competition from previously existing companies in the market. Most owners must be prepared to experiences some losses whilst building the business with clientele and brand awareness. The point of difference that can earn sole proprietors instant customers from the beginning can be quality goods or extremely low prices when compared to competitors (Anon. (2012) Setting up a business in Australia). A major disadvantage of sole proprietors comes from the fact that their businesses become part of them. In case of bankruptcy, the owner’s personal assets can be used to pay the debts. When the owner of the business dies the business stops immediately. This however, can be modified through the will (Anon. (2012) Setting up a business in Australia). The third largest business group is a trust (Anon. (2005) 8161.0.55.001 - Australian Bureau of Statistics Business Register, Counts of Businesses - Summary Tables, Jun 2004). This is a commercial organisation formed by trustees who own the title to the business property for the benefit of one or more people (Anon. (2005) 8161.0.55.001 - Australian Bureau of Statistics Business Register, Counts of Businesses - Summary Tables, Jun 2004). Examples of trusts include banks and micro finance institutions. This type of business structures work with the purpose of providing very crucial services at a cost (Joseph Miller (2009) Business Models). Other examples include insurance companies and real estate. These companies provide services that are crucial but are tough to be handled individually. For example in the case if a house is destroyed accidentally, it may be difficult for the owner to rebuild another house. However if, the owner insured the house it would be rebuilt immediately or the owner would be compensated. The reason as to why these types of companies are the third largest is that they prove to be extremely difficult to begin (Joseph Miller (2009) Business Models). Such companies depend on a vast customer base. The lack of one may lead to their crumbling. The capital needed to invest in the same happens to be enormous. Because trusts need a mass following means that they have immense benefits hence are exceedingly profitable (Joseph Miller (2009) Business Models). Trust companies need experienced business personnel to run and manage them thus making them, less popular. For example, a banking service will need an expert banker to establish it. Additionally they have large risk margins since they can be brought down by factors such as severe economic times; recessions and competition from other similar types of companies (Anon. (2012) Introduction to ASIC Connect). Such factors combined contribute to them being in the third position among the highest number of businesses (Anon. (2012) Introduction to ASIC Connect). Partnerships make up the least popular of businesses (Anon. (2005) 8161.0.55.001 - Australian Bureau of Statistics Business Register, Counts of Businesses - Summary Tables, Jun 2004). As discussed earlier they have quite a number of restrictions business owners must consider when starting a small business. Other disadvantages that partnerships face involves the paying of taxes. In regards to paying tax, all the partners pay tax as a sole proprietor (Anon (2010) Advantages and Disadvantages of Partnership). The partners also register as self-employed. In case one of the partners die, the partnership terminates immediately. This rule does not apply if there is enough capital to buy off the deceased’s share (Anon (2010) Advantages and Disadvantages of Partnership). On the other hand, partnerships have great potential of becoming successful companies. The main reason behind this is the fact that partnerships have the strongest foundation among all types of businesses (Anon (2010) Advantages and Disadvantages of Partnership). The only disadvantage can emerge if the partners engage in conflict between themselves. The process through which they can become companies involves the fact that all the key components needed to make the partnership a company are all present. Their presence depends on the purpose of each partner in the partnership. In the example, given above it is extremely unlikely for the partnership to go through bankruptcy since the financial backing already exists in the form of a partner. The production cannot also fail due to the presence of the production team in the partnership. Getting to sell the products also gets a boost from the presence of the marketer in the partnership. Additionally a partnership usually gives the benefit of shared responsibility. This means that any hardships that the partnership may be going through get to be handled by all the partners. This helps to prevent the downfalls that affect many businesses (Anon (2010) Advantages and Disadvantages of Partnership). In conclusion, sole proprietorships have the easiest make up whereas partnerships have the most complicated business models. Companies make up the majority of all businesses whereas Trusts account for the most complicated yet beneficial business. For an individual looking to start a small business, it would be easiest to set it up in the form of sole proprietorship. REFERENCES Anon (2010) Advantages and Disadvantages of Partnership [Online]. USA: The Company Warehouse. Retrieved from: http://blog.thecompanywarehouse.co.uk/2010/03/01/advantages-and-disadvantages-of-partnership/ [Accessed 14th September 2012]. Joseph Miller (2009) Business Models [Online]. Australia: All Business. Retrieved from: http://www.allbusiness.com/The-Business-Model-To-Choose [Accessed 14th September 2012]. KIM WYNESS (2008) 'THE CLASSIFICATION OF COMPANIES IN THE COMPANIES ACT', Law & the Entrepreneur, Vol. 45, No. 51, (the link is: https://www.google.co.ke/search?s?hl=en&sugexp=les%3B&gs_nf=1&tok=thQVmrqXNP2DY-KXVwcg1A&pq=classification%20of%20companies%20kim%20wyness&cp=31&gs_id=1h&xhr=t&q=classification%20of%20companies%20kim%20wyness&pf=p&client=firefox-a&hs=2xl&rls=org.mozilla:en-US%3Aofficial&sclient=psy-ab&oq=&gs_l=&pbx=1&bav=on.2,or.r_gc.r_pw.r_cp.r_qf.&biw=1360&bih=627&ech=1&psi=xopcUN3ZGOmh4gTEiYHoDQ.1348242146124.1&emsg=NCSR&noj=1&ei=xopcUN3ZGOmh4gTEiYHoDQ) Anon. (2012) Introduction to ASIC Connect [Online]. Australia: Australian Security and Investments Commission. Retrieved from: http://www.asic.gov.au/asic/asic.nsf/byheadline/Introduction+to+ASIC+Connect?openDocument [Accessed 14th September 2012]. Anon. (2012) Setting up a business in Australia [Online]. Australia: OCRA Worldwide. Retrieved from: http://www.ocra.com/solutions/doing_business_australia.asp?gclid=CNDM69Wis7ICFaTHtAod7jAAPQ [Accessed 14th September 2012]. Anon. (2005) 8161.0.55.001 - Australian Bureau of Statistics Business Register, Counts of Businesses - Summary Tables, Jun 2004 [Online]. Australia: Australian Bureau of Statistics. Retrieved from: http://www.abs.gov.au/ausstats/abs@.nsf/lookup/8161.0.55.001explanatory%20notes1jun%202004?opendocument [Accessed 20th September 2012]. Linda Kirk Fox (1992) Business ownership. Moscow: The Alternative Agricultural Enterprises publication. (the link is: http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&ved=0CCkQFjAB&url=http%3A%2F%2Fwww.cals.uidaho.edu%2Fedcomm%2Fpdf%2FCIS%2FCIS0939.pdf&ei=5o1cUMb4GIKRhQebuYDgCA&usg=AFQjCNEExO37AVTIW--Z6TOYjvI9MsG-_Q) Read More