Question

Elise, Adam and Thomas want to establish a restaurant called EATs. Elise is a retired bookkeeper and invested $20,000 in this venture. Adam and Thomas both invested $10,000. Elise is an excellent baker while Adam and Thomas graduated from culinary college and focus on the appetizers and main courses. They will all share equally in the work of the restaurant. Elise, given her background in bookkeeping, will do the financial records for the business.

They heard about a local restaurant owner that went bankrupt due to an outbreak of food poisoning from his restaurant. Until then, Elise, Adam and Thomas planned to register their business name, lease the property, and buy the necessary equipment and supplies. After hearing about the other restaurant owner, they are very nervous and want to discuss what they can do to protect themselves.

i. Identify and briefly explain the (relevant) business forms, including subtypes that are available to Elise, Adam, and Thomas, given the provided facts.
ii. Provide two advantages and disadvantages for each of the business forms that you identified in part (i). Be thorough in your answer.
iii. Which of these business forms would you recommend in the circumstances? Be sure to indicate why you would recommend it and why you would not choose the other(s), including any subtypes.

Answer 1

1.The relevant business forms are :

Sole Proprietorship : This was practiced by the business owner who went bankrupt in this case.

Sole proprietorship is a business owned by one person. All the operations are carried out by that one person only.He/She is the sole owner of the business. The owner is the supreme judge of all the matters pertaining to his business. He is solely responsible for investing capital , bearing risks and management for business.Also the business has no seperate identity.

Partnership : It is an association of two or more persons who agree to share the profits and losses and jointly pursue a business activity.They pool their managerial and financial resources for the purpose.They carry out the operations together. Subtype : general partnership- A type of partnership where each of the partner can bind the others for the debts of the partnership. It offer no liability protection to the owners.   Subtype : limited liability partnership- An essentially registered form of partnership where the partners have limited liabilties in the firm and one partner cannot bind the acts of another.One partner does not bear the responsibility of the actions of other partners.

Elise, Adams and Thomas were in a general partnership business and when they registered their business they became a limited liability partnership business owners. This can be supported by the fact that a limited liability partnership can only be created by certain types of professionals and all three of them were professionals. And Elise was a professional in book keeping and Thomas and Adams were professionals as they graduated from culinary.

2.Advantages and disadvantages of the business forms are :

Sole proprietorship -   advantages: It is easy to form and dissolve as no legal formalities are required to for setting up of this type of organisation.It does not have to be governed by any law. The owner is the sole beneficiary for all the profits that the business earns.There is also a direct incentive or relation between efforts and reward of the propritor in his business. Independent control: The total control lies in the hands of the proprietor only .He enjoys complete freedom of actions.He can feel a personal satisfaction and a sense of accompolishment if the business grows because it would be all of his efforts.

Disadvantages: The proprietor has limited resources as he is the only one to finance his business.and there is a limit to the credit raising capacity of a single person.and this reduces the scope of the business growth.He is also personally liable to all his debts. Limited managerial skills and life of business : All the activities are performed by a single person and he cannot be expert in many fields so there are a limited skills apllied in the business. Also the survival and continuity of the business depends on one person only.If he becomes insolvent or sick then the life of business might come to an end.

Partnership(General Partnership) - advantages : Easy to form: no legal formalities are required in the setting up of general partnership.Even the registration is not as such compulsory. Risk sharing is done as there are more than one person to bear risk in general partnership, they are the partners. Division of work and larger resources : All the partners contribute to the capital of the firm and thus the resouces are more for the business. The work is divided among the partners that does not create overload on one person.

Disadvantages : Unlimited liabilty in general partnership : The partners are liable even for their personal properties and can become bankrupt in genral partnership business. One partner is binded by the acts of another partmer in genral partnership.He has to bear the faulty decision of one partner.

Partnership(limited liability partnership) - advantages : Registration is compulsory so one party can sue another party legally. as registration identifies the legality of the business. Limited liability - all the partners are only liable to the amount they have invested in the business and not their personal property.

Disadvantages : Not easy to form - this can mostly only be formed by professionals in any field and also legal formalities are essential to perform. Conflicts among the partners as they now don't have to worry about the acts of another partners.

3.In these circumstances, I would recommend partnership ( subtype : limited liabilty partnership) because the risk of getting bankrupt is minimized in this as the partners are limited liable to the creditors or any third party. They are only liable to the amount they have invested in the business. Also there is an assurance of no risk bearance of the actions of another partners. There is longer longetivity of the business as the partners can carry on with the business even when one partner is not present. I would not recommend sole proprietorship as there are comparatively greater chance of getting insolvent as the owner is liable to everyone. Even in general partnership the partners are unlimitedly liable .