Small Business Finance - Case Study Example

Small Business Finance Student’s Name: Institutional Affiliation: University: 1. Business Activities of a Sole Proprietorship Next to my rental room is a small-scale shop where we make small-scale shopping. This kind of business is common in most parts of the world and they are located adjacent to residential houses. The small-scale business next to my room undertakes various activities. The basic activities involve purchasing of goods and reselling them in smaller quantities to the final consumer. The businessman keeps the books of accounts, where he records items such as purchases, sales, stock and debtors. These records are not comprehensive and usually the final accounts are not prepared. 2. The Legal Structure of a Sole Proprietorship The laws of a nation are very important as they help to maintain order along with a good social environment. In the business world, there are the laws that govern their establishment, ownership and operations. These laws give the structure of ownership and help to classify different types of business ownerships, tax regulations, the start-up capital and the registration fee paid to the government (Arthur & Sheffrin, 2003). The kind of business operated by my neighbor is a sole proprietorship. It is owned by one person who is the sole trader. It has a very simple legal structure and it is operated under minimum government intervention. The sole trader has the necessary license in his name, tax pin number, and the required capital with reference to his capability. These simple legal requirements are only for the sole-proprietorships, while other structures have more complex legal formalities .This legal structure also provides that the sole trader has unlimited liabilities where personal properties can be taken over to pay for business debts. The law does not separate the owner from the business. 3. Comparison of Sole Proprietorship and Other Legal Business Structures The legal structures of businesses provide for various options for entrepreneurs and business people to establish their operations in. Apart from sole proprietorships, there are others like partnerships and limited companies. A partnership structure is required by law to be owned by a minimum of two and a maximum of twenty, except for professional partnerships with a maximum of fifty. The partners contribute capital and share profits and losses. A sole proprietorship is owned by one person who raises capital alone, enjoys profits, and bears losses alone. Some members of a partnership have limited liability while the sole trader has unlimited liability. The law requires the partnership to start operation with a partnership agreement been put in writing, or else comply with the partnership deed as stipulated in the partnership act (Karayan & Swenson, 2007). Some business entities are unique in their naming as they end up with the word limited. These are limited companies. They come into existence after registration with the registrar of companies, and are considered to be incorporated. This structure has two categories; the public, which can sell shares to the public and easily transfer shares, and the private companies with restricted transfer of shares, which are not allowed to be sold to the public. Limited companies have a different structure from sole proprietorships in that they have artificial personality separate from its owners .They can be sued, sue, have the rights to purchase, own and sell property in their own name. Unlike the sole trader, the owner(s) of companies have limited liability hence their property cannot be used to pay for the company’s debts. Companies can be formed by a minimum of seven people and a maximum of fifty for a private company, and an unlimited membership for public companies. Companies outlive the owners as the death of a member does not bring it to an end (Karayan & Swenson, 2007). 4. The Inappropriateness of the Legal Ownership of Sole Proprietorships This structure of business is not the most appropriate due to its limits and setbacks compared to other structures that are available. The unlimited liability characteristic makes it to be a less preferred structure. The sole trader is not spared, as his personal property is taken over if the business is unable to repay its debt. It has very limited sources of finance, and hence, its expansion is very slow. It only depends on the owner’s savings and minimal borrowing, unlike in partnerships where partners can raise a good amount from their contributions, and limited companies from the sale of shares. The revenue of this operation cannot support the hiring and maintaining of qualified employees, and hence, the sole trader can be overworked by performing most, if not all the functions of business. The other forms are able to raise enough revenue, and hire various people to assist in their operations who can be skilled, thus efficiency can be achieved. 5a. REASONS WHY TRADERS START SOLE PROPRIETORSHIPS People have different reasons for starting businesses. Most of these motives are universal and common to most business people, and entrepreneurs. The most common is the need to be a self- employed person, with freedom to make decisions without employer’s interference, and be able to plan as well as attain personal objectives. The employed may not be able to meet their financial needs by the wages and salaries from their employment. Most of them start up a business to boost their financial strength. Those who succeed get a very good financial base, and they grow at a very high rate compared to those who stick to the world of employment only (Graham & Harrison, 1995). Some people have passion in the businesses they start, and operate them out of their self interests. They make proper research and raise funds, as well as other resources, and set up a business they are interested in. The reward of entrepreneurship is the profits earned. The basic reason to start a business is to earn profits. The more profits you expect, the more you are motivated to be in that business (Fairlie & Robb, 2007). 5b. Motives for Operating a Sole Proprietorship and Wealth Maximization It has been established that some people have more wealth than others. This is measured by the financial and other resources that one has by legal ownership. Wealthy people do not just happen to be, they generate it over time until they are noticed by others as wealthy. Wealth maximization is the concept of increasing the net worth overtime, by generating income and using part or the whole income to increase the asset base. In small businesses, identified wealth maximization can be a continuous retaining of profits realized to strengthen the capital base and expand the business. Small businesses are usually started with limited amounts of capital due to constraints experienced by the owners. They, therefore, need to accumulate more wealth to expand. This can be effected through wealth maximization. Wealth maximization will help the business expand with time, and enable it to realize the economies of scale (Fairlie & Robb, 2007). 6. Key Characteristics of Sole Proprietorships Businesses have unique features that separate them from one another. Small-scale businesses raise low levels of revenues compared with others. Therefore, limited profits are realized. Small businesses are operated by a small team or an individual. They, therefore, have a few or one employee. Large small-scale businesses have at most a hundred employees. These employees are mostly unskilled, and they provide unspecialized services. Unlike large scale businesses, they operate at fixed locations. They operate only from a single premise, office, or station like a kiosk. The market coverage of small-scale businesses is limited to their locality. They only serve the community around it and not beyond. The ownership is basically by one person or a few individuals who come together and contribute capital to start up. They are, therefore, managed by one or few individuals. Government intervention and regulation of these business activities is very important to ensure smooth running of businesses .This intervention is minimal for small scale businesses (Scott, 2003). References Arthur, S. & Sheffrin, S. M. (2003). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. Fairlie, R. W., & Robb, A. (2007). Families, Human Capital, and Small Business: Evidence from the Characteristics of Business Owners Survey. Industrial and Labor Relations Review, 60 (2), 1-22. Graham, G., & Harrison, J. J. (1995). Collection techniques for a small business. London: Oasis Press. Karayan, J. E., & Swenson, C. W. (2007). Strategic Business Tax Planning, 2nd Edition. Hoboken, New .Jersey: John Wiley & Sons. Scott, S. (2003). A General Theory of Entrepreneurship: the Individual-Opportunity Nexus. Northampton, MA: Edward Elgar publishing Inc. Read More