Question

Case Study 2
Case scenario: Which Form Is Best?
Watoma Kinsey and her daughter Katrina are about to launch a business that specializes in children’s parties. Their target audience is upscale families who want to throw unique, memorable parties to celebrate special occasions for their children between the ages of 5 and 15. The Kinseys have leased a large building and have renovated it to include many features designed to appeal to kids, include many features designed to appeal to kids, including special gym equipment, a skating rink, an obstacle course, a mockup of a pirate ship, a ball crawl, and even a moveable haunted house. They can offer simple birthday parties (cake and ice cream included) or special theme parties as elaborate as the customer wants. Their company will provide magicians, clowns, comedians, jugglers, tumblers and a variety of other entertainers.
Watoma and Katrina each have invested $45,000 to get the business ready to launch. Based on the quality of their business plan and their preparation, the Kinseys have negotiated a $40,000 bank loan. Because they both have families and own their own homes, the Kinseys want to minimise their exposure to potential legal and financial problems. A significant portion of their start-up costs went to purchase a liability insurance policy to cover the Kinsey in case a child is injured at a party. If their business plan is accurate, the Kinseys will earn a small profit in their first year (about $1,500), and a more attractive profit of $16,000 in their second year of operation. Within five years, they expect their company to generate as much as 50,000 in profits. The Kinseys have agreed to split the profits and the workload equally.
If the business is as successful as they think it will be, the Kinseys eventually want to franchise their company. That, however, is part of their long range plan. For now, they want to perfect their business system and prove that it can be profitable before they try to duplicate it in the form of franchises.
As they move closer to the launch date for their business, the Kinseys are reviewing the different forms of ownership. They know that their decision has long term implications for themselves and for their business, but they aren’t sure which form of ownership is best for them.
Answer all questions.
1. Which form(s) of ownership would you recommend to the Kinseys? Explain.

2. Which form(s) of ownership would you recommend the Kinsyes avoid? Explain.

3. Examine the factors that the Kinsyes should consider as they evaluate the various forms of ownership.

Answer 1

1. The form of ownership I would recommend to Kinseys would be limited liability company law or partnership.

In partnership, it would be relatively more accessible for the business to maintain their administration and the profit distribution in the way they want to. Partnership would be easier to establish and to manage and control.

Moreover, they can also make sound decisions while limiting the control in the hands of a few. They can also go for the private corporation or the professional limited liability company, which would also provide similar benefits.

2. The forms of ownership I would recommend the Kinseys to avoid sole proprietorship and business corporation, either s or c.

Though Watoma and Katrina are mother and daughter, but I would recommend not to go for sole proprietorship because they want to divide the profits in equal proportion and both are separately investing in the organization. So, they cannot go for a sole proprietorship.

The business corporation would be costly to operate and establish. It would be very complicated, and there are chances that they would not retain their profit shares and equity ratio. So it would not be beneficial for them to go for these forms of organization.

3. factors they should consider while determining and evaluating the various forms of partnership would be their scale of operations and capital requirement. They would also have to consider the degree of control and management they want. Apart from that, they should evaluate business organizations based on the degree of risks and liabilities.