Question

For each of the hypotheticals, you should prepare an analysis for each situation explaining what business organization form the business should use. You should define and explain key terms and concepts. Your combined responses on the two business situations should be between about 650 to 850 words. Include a word count in your submission.

You should study Chapters 19 & 20 before working on this assignment and rely on specific information from the text to support your analysis. Detailed analysis is required for this assignment.

Business Situation No.1

Joe operates a local gardening and tree trimming business. Joe also does some light landscaping work for a few of his commercial accounts. Joe is very successful and has enough clients to keep him busy, along with at least three workers, working six days a week. Occasionally, a client rents a piece of equipment from Joe’s business. Clients sometime take their time paying for Joe’s services and, therefore, Joe is sometimes late paying his bills.

Joe’s capital is only about $25,000, most of which consists of his new $20,000 truck and his assortment of lawnmowers, chainsaws, edgers, and gardening equipment. Joe’s wife handles the books, yet is not involved in actual business operations. Should Joe continue to operate his gardening and tree trimming business as a sole proprietorship? Explain.

Business Situation No. 2

As a part of a course assignment, a group of graduate students from JSU have developed a prototype for a new microchip to power the next generation of personal computers. The students have received assurances from venture capitalists to provide whatever financing the students will need to manufacture the chip, provided they receive 51% of the equity. The venture capitalists do not want to interfere in the business operations and have agreed to allow the students to control the operations, provided certain financial objective are achieved. The students and the venture capitalists expect to begin manufacturing of the chip within two years. Based on outside evaluations, the chip should be a success. The students/venture capitalists expect to go public within five years.

What type of business entity should be formed by these graduate students to manufacture and develop the chip (and to conduct further research and development)? Consider whether more than one company should be formed. Explain.

Answer 1

The given two business situations have been analysed based on the kind of business activity, the level of risk the partners/ parties are willing to undertake and cost involved with compliance and other relevant considerations such as business expansion and IPO plans.

If a venture involves limited business activitiy carried on by 1 or few people it makes sense to form a Sole Proprietorship or partnership kind of set up. If a venture is intended to belong to multiple people and where stakes of people are unknown, it makes sense to have a Limited Liability Company in place. With a Company, even though compliance cost and burden may rise, but it offers a host of other advantages vis-a-vis a sole proprietorship or a partnership business, such as limited liability, better fund raising options, tax benefits, option to go public

Business Situation 1

In situation No. 1, Joe operates most of the business on his own with help from some of workers. The wife also just looks after accounts and is not involved in actual business operations. Given the nature of work done by Joe, it makes sense for him to continue as a sole proprietor. If it intends to make his wife a co-owner, it may consider forming a partnership as well.

However, if in future Joe intends to expand his business and stakes of other people get involved, he might to consider opening a partnership firm or a Company. Currently, Joe owns all the equipment, is responsible for the work and therefore is solely liable and entitled to all proceeds from the business. Further, as long as he is solely carrying out the business activities, there is nothing that precludes him from providing multitude of services unlike a Company which is usually formed for a particular line of business.

The liability of Joe shall be unlimited and shall extend to personal assets. However if it intends to have a limited liability towards creditors and stakeholders, it might consider forming a Company. However given the nature and scale of Joe's business, forming a Company would lead to unnecessary complications and compliances and not worth the effort.

Business Situation-2

In situation no. 2, students and VC expect to manufacture a chip, indulge in R&D activities. Once the chip is manufactured, it would need to be patented so as to avoid any possible infringement. Further, the students/VC expect to go public in 5 years. Multiple stakeholders / owners are involved and no one person would like to take an unlimited liability arising out of the venture. In such a scenario, it makes sense to form a Limited Liability Company with students and VC as shareholders/owners. Once the chip is developed and ready for commercial roll-out, the VC can exit the firm through an IPO. This form of set up is possible only with a Limited Liability Company.

Certain countries also offer tax rebates to companies in R&D activities or start-up. Such incentives are generally available to only Company form of set up. Moreover, since this is a start-up more funding would be required in future which shall be easier with a Company than with a Partnership Firm.

Hypothetically if the VC firms back out from providing the funding, having a Company form of set up provides an opportunity to raise money through new issue.Further, if the venture is a failure, with a limited liability company the personal property of the students shall not be attached as their liability would be limited to the amount of their equity ownership.

Now coming to the question of whether one company should be formed or two companies would ideally depend upon the various types of owners and the tenure of their ownership. Forming two separate ventures or companies is not required as the Venture Capitalists generally stay with the company for few years and can exit the same anytime either through an IPO or by way of sale of stake to another. Forming 2 different companies would unnecessary increase compliance burden and costs.

Word Count - 667 words