U1L5 Business Structures Flashcards
Justin, Austin, and Mattaio have been close friends since high school, and even went to college together. All three graduated last year; Justin with a degree in Computer Science, Austin with a degree in Graphic Design, and Mattaio with a degree in Business Administration. All three have worked part-time through high school and college fixing computer problems. Each has approximately $50,000 in savings for this business venture. They have been talking about starting a computer company (JAM Computer Solutions) in their local town to help businesses and individuals with computer problems or those who need help developing and designing web sites. In doing research, Justin found that there are only two other computer companies in their town of 100,000 people, and neither one will do both web design and computer hardware/software troubleshooting.
A partnership would be the best structure for this business because:
3 members, each investing in, and bringing unique skills to the business
all three would likely work in or on the business
Marlin Hatfield, who is married and 27, just completed their fifth year as a journeyman carpenter with John Casey Homebuilders, a small homebuilder 25 miles from their hometown. Marlin has just received an inheritance of $100,000 from their favorite aunt. During the past five years, Marlin has been able to purchase many of the tools and equipment that they need to be a good finish carpenter. Marlin has not been satisfied working for John the past couple of years and has talked with their partner about starting their own business (M and K Fine Carpentry). Marlin’s parner, Katherine, agrees that in order to be happy, Marlin may want to open their own business. She fully supports Marlin. Katherine graduated from the local university with a degree in accounting and works for a local accounting firm.
A Soleproprietorship would be the right choice for this business. It is clear that Marlin would be providing the majority of the investment and labour for the business. As he is just starting out, the simplicity and affordability of the soleproprietorship structure would benefit Marlin. Even if his partner helps with the accounting, it is not clear if they would do so full time and likely would not need an ownership stake in the business to provide this work.
Sole Proprietorship
advantages
One person owns it and it is easy to form
Unlimited liability
All profit is entirely owned by the owner
All decisions are made by the sole proprietor no matter how big the business is
Sole Proprietorship
Disadvantages
The life of a sole proprietor is limited to the time that the owner is able to operated the business
The loss as well as the expenses are all incurred by the proprietor
They have to be diligent in making sure that employee records and employment laws are properly upheld
Long hours of work
Difficulty in rasing capital
They bear all the financial risks
Partnership
Advantages
Easier to form
Only taxed once (declared on each partner’s tax return)
They have unlimited liability
They can secure financing more easily because more than one person is able to obtain credit
Partnership
Disadvantages
Many failed partnerships were the result of poor economic decisions or unethical behaviour
If one partner is unable to pay for their share, and the other one is responsible for paying for them
It’s risky to be in a general partnership sometimes
Corporation
Advantages
A new legal entity is created when the Articles of Incorporation is approved by the state
Stock holders have limited liability over the cooperation
Its easier for corporations to raise capital
Unlimited life span
Corporation
Disadvantages
Disadvantages
More complicated
Follow stricter regulations
People must buy their stocks; and those that buy them become owners of the corporation
Franchise
Advantages
Quick startup: Easy to start
A proven business plan: When following a proven franchise business plans, they usually work out and end successful
Recognizable trademark brand
A pre-existing infrastructure
Access to training and support: helpful for planning and the other factors into developing a franchise
Franchise Disadvantages
Contract Challenges: When wishing to terminate a contract with the frachisee, they may face serious consequences.
Costs: Franchisors need to pay a royalty fee for the use of the trademark, and a reimbursement fee for training and advisory services.
Growth Challenges: For the franchisee to be successful, there must be assurance that any future franchises do not crowd the territory
