Question

Harry has inherited $50,000 from his parents, and he wants to open a business with that. Which form of business organization would you recommend? What are the consequences for Harry if the business fails?

a) He wants to open a small restaurant. It needs $100,000 investment, and Harry can borrow $50,000 from a local bank.

b) He wants to open a restaurant. It needs $200,000 investment, and Harry can borrow only $50,000. His brother, Ryan, is interested in investing in Harry's new business on a condition of being involved in the day-to-day management.

c) He wants to open three restaurants. It needs $500,000 investment, but Harry and Ryan only have $100,000 together and can borrow up to $100,000. Harry is happy to share the management with his brother, but no one else

Answer 1

Prospects and consequences:

(a) If Harry opens a small restaurant,

Capital Requirement = $100,000

Borrowing Amount = $50,000

Harry's contribution = $50,000

The above stats shows that Harry will be opening his reataurant as a SOLE PROPREITORSHIP BUSINESS.  I reccommend this option because he will be sole owner of his company and raising debt from the bank to start his business will be a good option and provide him capital. Incase of failure, he will be defaulter to the bank if he does not pay back the loan amount with interest. His capital would also dissolve.

(b) In this option Harry may be the sole owner of his restaurant but involvement of Ryan in day to day management may lead to conflict in decision making and other factors such as interference and conflict of interest. Moreover, Ryan being the major capital investor, may hold majority stake in his business. If business fails, Bank, Ryan and Harry all will lose, Ryan being more affected.

(c) This option is not possible because after combining the capital raised and capital deployed by Ryan and Harry  for their business is not enough and unwillingness of Harry to share the management will other apart from his brother will end their chance of raising Initial required investment to start the business.