Question

Background Information
Bruno and his friend Bobby decide to open a Tattoo and Body Piercing Parlour. Bruno is a talented tattoo artist and Bobby enjoys poking holes in living things.

Assignment Question:
Using the 6 Legal Considerations of Business Organization, evaluate their decision to organize their business as a partnership. Was it the right decision? How would you deal with any disadvantages with their choice?

1. Ownership, control, and formation of business:

2. Financing:

3. Liability:

4. Profit:

5. Income Taxation of Profit:

6. Continuity:

Answer 1

The decision to organize the business as a partnership can be evaluated against the following points:

1. Ownership, control, and formation of business:

The advantage is that the ownership and control rests with Bruno and Bobby. They can take their decisions and are not accountable to any other. There is no threat of being taken over by any other entity.

The formation of the partnership is easy, as it have very little formalities.

2. Financing:

The financing should arise from the personal resources of the partners. They may also go for business loans from any financial institution.

But, as they cannot approach the public for funds, their capacity to invest would be limited to their personal resources. Borrowings would also be limited to the proportional equity that they can put.

3. Liability:

As a partnership they have unlimited liabilitty in that they are collectively and individually responsible to pay the debts of the firm. Their personal property would also get attached.

Unlimited liability is the major drawback of the partnership organization.

4. Profit:

They can share the profit between themselves and can decide the extent of payouts. They need not satisfy anybody else as to the sufficiency of distributions. However, losses have to be borne by the two.

5. Income Taxation of Profit:

Partnerships are pass through entities for taxation purposes. It means that the partnership is not taxed, but the partners have to include their share of partnership profit and losses in their individual return and pay taxes accordingly. This can be an advantage or a disadvantage depending on ones personal incomes.

6. Continuity:

A Partnership does not have perpetual life. It ceases to exist when one of the partners, retires or dies or beconmes incapacitated legally. In such an even it will be difficult to carry on with the partnership business.

It is also difficult to exit from a partnership. In contrast one can sell ones shares in a company and exit from it at any point of time.

SUITABILITY:

The business of Bruno and Bobby is a personalised service rendering business and depends on the expertise of the two in the field. The scale of operations would be localized and hence would be small. Hence, finance requirements would be limited and it can be sourced from therir personal resources or small loans from banks. a Partnership would be ideal for them.

Besides, they need no outside expertise and can take their own decisions within themselves as partners.

As liabilities would be limited risk of unlimited liability may not arise.

Continuity is irrelevant as the business depends on their individual expertise, which in any way cannot be carried on endlessly.