Question

In: Finance

Mr. John decides to start a small business with the intention to expand it in the...

Mr. John decides to start a small business with the intention to expand it in the future. He has some capital, but he fears he may lose some of his personal assets if the business fails. Also, Mr. John is not sure he has enough capital to proceed with a sustainable business. At the same time, he has some doubts in sharing the ownership of his business with partners that had not to participate in the 'creation of his business project'.

Having in mind these issues, advise Mr. John regarding what you consider to be the optimal business type for a safer, and with more prospects of development and sustainable growing business. Argue by comparing the business types that can be considered a viable option.

(400-700 words)

Expert Solution

Mr John has to carefully decide the legal status of his business. Legal status is very important because it can protect Mr Johns asset in case of failure of business. Mr John should consider registering his business either as a one person company, private company or limited liability partnership firm.

This legal status limits Mr John's personal liability in case of business failure.

In case of private company or limited liability partnership firm he can register either his spouse or his parents as partner.

Suppose Mr John wants to start the business with $10000. He should show $2000 as capital and $8000 as secured loan to business. As he and Business are separate legal entities in cases of legal status I mentioned above.

So if the business fails and Mr John Business has an outside liabilities of $7000 to the creditors in case of liquidation. Mr. John has asset of $11000 at the end.

business has to pay only $3000 and Not $7000 to the creditors of the business. He has to pay $8000 towards secured loan (that is himself).

In a way he is protecting himself.

11000=3000+8000

3000- Creditors

8000- Loan (himself).

In case his business had a legal status of proprietorship then.

11000= 7000+4000

7000= Creditors

4000= himself.

So so you can observe how legal status has protected and saved a lot of money for Mr John.

So Business type of one person company, private company and limited partnership will help Mr John achieve his goal. It is safe and it is legal.

Thank you. Hope you find the solution helpful.

jeff jeffy answered 7 months ago

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