Question

Question 1: Choice of entity

1. For the following situations, applying what you have learned about sole traders, partnerships, limited partnerships, and companies consider the most appropriate organisational structure for the enterprise. In each case give a reason, or reasons, as appropriate, to support your suggestion. Guidance: Your reasons for each part of this question should include why one or more of the available options are excluded, as well as the reasons that support your suggested organisational structure.

(a) Raya, who works in a gym, occasionally sells to sports magazines articles she has written on new developments in personal training.

(b) Three friends start a café. All three will be active in decision making but a precise organisational structure is required for operational practicality. The project involves a degree of business risk and they wish to protect their personal liability as much as possible. Some flexibility is also required as it is envisaged their spouses will be added to the group over time as their business expands. They do not require their participation in the enterprise to be secret and are happy to get any publicity available.

(c) Dion is a scientist who has developed an enzyme that breaks down plastic drink bottles. He wishes to patent and develop his discovery. Iosefina, Rosa and Michelle are low profile venture capital providers who are not technical experts in the scientific field but have money to invest in high risk start-up businesses where successful development brings a high financial return. They agree to provide some funding for Dion’s project. They do not want to take an active part in the business other than in providing the money required and receiving a share of the anticipated profits. If the project fails, Iosefina, Rosa and Michelle do not want any further liability in addition to the money they have already provided. They also wish to keep their involvement in the project secret.

2. Explain two ways in which joint venturers could ensure they do not form a partnership.

3. Compare the use of a partnership and a company as the business form for SMEs when new capital is introduced.

Answer 1

1(a) Raya as individually dealing to sell magazines can go for Sole propertiership as it is easy to inform & having complete managerial control to the owner.

1(b) We recommend to form a Company for the following reasons :

(i) They wish to protect their personal liability and the Company stakeholders are having LImited Liability

(ii) They want flexibility - It is easy to add stakeholders in a company

(iii) They need publicity - A company gets publicity as listed in stock exchange

1(c) Dion & other partners can go for Limited Partnership for the folllowing reasons :

(i) A limited partnership is a partnership which has a general partner, who manages the business and has unlimited personal liability - In this case, Dion is the general partner as he is only to take part in decision making and bear all the debts

(ii) A limited partnership has others as a limited patner who has limited liability to the funds he has invested and cannot participate in the management. I the present case, Losefina, Rosa & Michalledo not want any further liability in addition to the money they have already provided.

(iii) A Limited partnership is not listed in stock exchange . hence, their involvement in the project will be kept secret.

2) A joint venture can ensure they do not form a partnership by :

a) if they aims to undertake a specific task

b) For a limited period till the goal/task is achived whereas the parternship will last for many years until the partners involed have no differences.

3. Comparision between use of a partnership and a company when new capital is introduced :

a) In a partnership firm, liability of members is not only limited to the capital they have invested in the firm, but their personal assets are also liable for all debts & obligations of the firm

In a company, liability of members are limited to the capital they have invested in the company by way of shares.

b) There is no minimum paid up capital required to start a partnership firm whereas to start a company a minimum paid up capital is required as per the law.