Question

1. David is an experienced restaurant manager who wants to open his own restaurant (at one location only) and be the manager of it. He knows that he needs at least $100,000 to create and operate the business, and he knows that he can only raise $50,000 on his own towards the $100,000 he needs. Name for him all of the types of business organizations that exist (all of them). Tell him which two of those business organizations would likely be his best options, and tell him what the advantages and disadvantages of each of those two are. Then tell him which one of the two you would recommend that he use to operate the restaurant business, and include at least two reasons as to why you would choose that type of business organization over the other one.

Answer 1

The types of business organizations that exist are as follows-

1. Sole Proprietorship

2. General Partnership

3. Limited Partnership

4. Joint Venture

5. Limited Liability Company

6. Business Corporation

As david is not in possession of the the required initial capital needed to setup the business and the possibility of getting loans has also been not mentioned in the case, so he cannot go for the sole proprietorship. While also he does not have plans to operate from more than one location i.e. set up a large multi location restaurant chain, business corporation is also not suited to his purpose as of now. Thus, the two business forms most suited for him would be -

1. General Partnership

2. Limited Liability Company

The advantage associated with general partnership is that it is simple to incorporate and makes sharing of assets, profit and debts on equal basis, if not agreed otherwise by the partners.

However, the disadvantage is that it presumes joint and several liability. In the event of losses if other partner's don't agree to provide for loss amount, then David would have to pay for the entire losses.

The advantage associated with limited liability company is that the liability is defined according to the preferences of the partners. Therefore it overcomes the drawback experienced with the general partnership.

The disadvantage is that that at certain stages it may cease to exist as limited liability company and may have to be incorporated as a corporation, if the business grows beyond a given value.

Between the two business forms mentioned above, I would recommend david to look for the limited liability company as-

1. It defines the share of liability in the event of losses.

2. It provides for avenues to incorporation as a business corporation if the business grows over time.

3. It includes advantages of both the partnership and a corporation.