Question

need help asap please

Stacy, a longtime friend of yours, has had a passion for baking as long as you've known her. She has recently come into an inheritance, and is investigating the possibility of opening her own bakery. After you inform her that you are taking an accounting class, she asks for your advice on several issues. Draft a letter to Stacy addressing the following issues: - What form of business organization - proprietorship, partnership, or corporation - do you recommend Stacy use for her business? Discuss the benefits and weaknesses of each form she may consider. - Will Stacy need accounting information? If yes, what information will she need and why? - Identify the different financial statements that Stacy will need to prepare for the business, and the purpose of each of the statements.

Answer 1

ANSWER

Dear Stacy

I got to know about your interest in opening a new bakery so I'm happy to tell you about some of the things about which you seeked my advise

I think you should use proprietorship as the form of organisation for your business A sole proprietorship, also known as the sole trader, individual entrepreneurship or proprietorship, is a type of enterprise that is owned and run by one person and in which there is no legal distinction between the owner and the business entity.

The benefits of this are

• A proprietor will have complete control of the entire business, this will facilitate quick decisions and freedom to do business according to their wishes
• Law does not require a proprietorship to publish its financial accounts or any other such documents to any members of the public. This allows the business a great deal of confidentiality which is sometimes important in the business world
• The owner derives maximum incentive from the business. He does not have to share any of his profits. So the work he puts into the business is completely reciprocated in incentives
• Being your own boss is a great sense of satisfaction and achievement. You are answerable only to yourself and it is a great boost to your self-worth as well

However it has some of the weaknesses too like

• One of the biggest limitations of a sole proprietorship is the unlimited liability of the owner. If the business fails it can wipe out the personal wealth of the owner as well and affect his future business prospects too
• Another problem is the limited capital a sole proprietor has access to. His own personal savings and money he can borrow may not be enough to expand the business. Banks and financial institutions are also wary lending to proprietorships
• The life cycle of a sole proprietorship is undecided and attached to its owner. If the owner is incapacitated in any way it has a negative effect on the business, and it may even lead to the closure of the business. A sole proprietorship cannot carry on without its proprietor.
• A sole proprietor also has limited managerial ability. He cannot be an expert in all the fields of the business. And limited resources may mean that he cannot even hire competent people to help him out. This may lead to the business suffering from mismanagement and poor decisions

there are some of the other types of organisations as well like

Partnership

When two or more  persons come together, pool their capital and skills and organise a business, it is called partnership. Partnership grows essentially because of the limitations or disadvantages of proprietorship

its advantages are

1. Easy Formation:

Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is relatively ease to form. Legal formalities associated with formation are minimal. Though, the registration of a partnership is desirable, but not obligatory.

2. More Capital Available:

We have just seen that sole proprietorship suffers from the limitation of limited funds. Partnership overcomes this problem, to a great extent, because now there are more than one person who provide funds to the enterprise. It also increases the borrowing capacity of the firm. Moreover, the lending institutions also perceive less risk in granting credit to a partnership than to a proprietorship because the risk of loss is spread over a number of partners rather than only one. .

3. Combined Talent, Judgement and Skill:

As there are more than one owners in partnership, all the partners are involved in decision making. Usually, partners are pooled from different specialised areas to complement each other. For example, if there are three partners, one partner might be a specialist in production, another in finance and the third in marketing. This gives the firm an advantage of collective expertise for taking better decisions. Thus, the old maxim of “two heads being better than one” aptly applies to partnership.

4. Diffusion of Risk:

You have just seen that the entire losses are borne by the sole proprietor only but in case of partnership, the losses of the firm are shared by all the partners as per their agreed profit-sharing ratios. Thus, the share of loss in case of each partner will be less than that in case of proprietorship.

5. Flexibility:

Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and quickly react to the changing conditions. No giant business organisation can stifle so quick and creative responses to new opportunities.

6. Tax Advantage:

Taxation rates applicable to partnership are lower than proprietorship and company forms of business ownership.

Disadvantages:

In spite of above advantages, there are certain drawbacks also associated with the partnership form of business organisation.

1. Unlimited Liability:

In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners’ personal assets may be at risk if the business cannot pay its debts.

2. Divided Authority:

Sometimes the earlier stated maxim of two heads better than one may turn into “too many cooks spoil the broth.” Each partner can discharge his responsibilities in his concerned individual area. But, in case of areas like policy formulation for the whole enterprise, there are chances for conflicts between the partners. Disagreements between the partners over enterprise matters have destroyed many a partnership.

3. Lack of Continuity:

Death or withdrawal of one partner causes the partnership to come to an end. So, there remains uncertainty in continuity of partnership.

4. Risk of Implied Authority:

Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also.

now third form of organisation is body corporate

A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes

Advantages:

The important advantages of company form of ownership are as follows:

1. Limited Liability:

The liability of shareholders, unless and otherwise stated, is limited to the face value of shares held by them or guarantee given by them.

2. Perpetual Existence:

Deaths, insanity, insolvency of shareholders or directors do not affect the company’s existence. A company has a separate legal entity with perpetual succession.

3. Professional Management:

In company business, the management is in the hands of the directors who are elected by the shareholders and are well experienced persons. In order to manage the day-to-day activities, salaried professional managers are appointed. Thus, the company business offers professional management.

4. Expansion Potential:

As there is no limit to the maximum number of shareholders in a public limited company, expansion of business is easy by issuing new shares and debentures. Companies normally use their reserves for expansion purposes.

5. Transferability of Shares:

If the shareholders of a company are displeased with the progress of the business, they can sell their shares any time. During all this change of ownership, the business continues to operate.

6. Diffusion of Risk:

As the membership is very large, the whole business risk is divided among the several members of the company. This is an advantage particularly for small investors.

Disadvantages:

In spite of its several advantages, the company form of ownership also suffers from some disadvantages.

The important ones are:

1. Lack of Secrecy:

As per the legal provisions, a company has to make various statements available to the Registrar of the Companies, Financial Institutions; the secrecy of business comes down. It is further reduced when the company provides its annual report to the shareholders as the competitors do also find out the details of all financial data.

2. Restrictions:

Compared to proprietorship and partnership, a company has to comply with more legal requirements. It consumes considerable time and effort.

3. Management Mischief’s:

Sometimes the managers and directors misuse the company resources for their personal benefits. This brings losses to the company and company is closed.

4. Lack of Personal Interest:

Unlike proprietorship and partnership, the day-to-day affairs of a company are looked after by salaried managers. Since they are the employees not the owners, they do have hardly any personal interest and commitment in the company. This may result in inefficiency and, in turn, losses.

Corporations also have disadvantages compared to proprietorships and partnerships when it comes to taxation. Since the corporation and the stockholders are considered to be two different legal entities, they face the problem of double taxation, meaning that the owners are taxed twice.

If an owner of a corporation works for the corporation, he is paid a salary, and possibly bonuses, like any other employee. He pays taxes on this income, as do regular employees, reporting and paying the tax on his personal tax return. The corporation also pays taxes on whatever profits are left in the businesses after paying out all salaries, bonuses, overhead and other expenses.

Another issue that some might take as a disadvantage to corporations is that the stockholders are not actually owners considering the fact that they are not the decision makers, rather the management is the one that owns the corporation as they have all the decision making power.

Accounting for sole proprietorships does not usually require individuals to maintain separate records for their business and personal assets. The reason is the business cannot exist in the absence of the owner. However, small business owners should seriously consider is separating business and personal records.. So you shall need to have accounting information about the prices of the raw material like flour and eggs and sugar and all the rest of the things you shall be using also you have to determine the selling price of the final products

some of the financial statements also have to be prepared at the year end like

• Balance sheet -The purpose of the balance sheet is to reveal the financial status of a business as of a specific point in time. The statement shows what an entity owns (assets) and how much it owes (liabilities), as well as the amount invested in the business (equity)
• cash flow statement-The purpose of the cash flow statement is to show where an entities cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over a specific period of time
• statement of profit and loss A profit and loss statement summarizes the revenues, costs, and expenses incurred during a specific period of time. The P&L statement provides information about whether a company can generate profit by increasing revenue, reducing costs, or both