Question

Penny has recently retired after working as a lawyer for 30 years. However, to keep herself active and also to earn some money for holidays she is planning to sell cup-cakes at the Farmers Market held in her locality every Saturday. Penny inherited a unique recipe for cakes from her grandmother and believes her cakes will hit the market. Penny is looking forward to a relatively quiet lifestyle aims to minimise paperwork or legal complexities. Advise the most appropriate business structure to Penny explaining the reasons.

Answer 1

The business structure that Penny chooses in this scenario shall influence everything from her daily operations, to taxes, to how much liquidity position that she shall have. The choice should be made in such a way that it gives her the right balance of legal protection and rights.

Here, the right choice of business structure would be a sole proprietorship. A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and the owner. You are entitled to all profits and are responsible for all your business's debts, losses and liabilities.[As per the USBA Guidelines]

Since Penny is looking forward to a relatively quiet lifestyle aimed to minimise paperwork or legal complexities, sole proprietorship is the best option for her. This type of business structure does not avail a separation of the business entity from its owner or protection of personal and professional assets, which would seem like an issue if the business grows at a substantial level. The costs incurred will depend on the markets as well. In this case, she is planning to sell cup-cakes at the Farmers Market held in her locality every Saturday. This will incur less costs for Penny. The usual expenses include basic taxes, equipment, office space, store space, banking charges, professional service charges, etc.  

Some of the advantages for the sole proprietor in this scenario is :

1. Easy to set up : The business is easy to set up due to less formalities and paperwork required for the same.
2. Lower cost of operations : Since the scale of business is usually low, the cost of initiation and operations at the beginning are very low.
3. Tax Reductions (e.g, insurance benefits) : The sole proprietor can avail various tax reductions if they choose this type of business structure.
4. Easy exit from market : Similar to the entry into the market, it is easy to exit as well, since it does not require much legal formalities or paperworks.