Question

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

There are following popular forms of business: -

1. Proprietorship
2. Partnership
3. Company
4. Association of persons
5. Body of individuals
6. Others

In the first case Joe is operating in proprietorship but facing following problems:-

• Not adequate capital
• Not much manpower to handle the business properly
• May not be able to supply things/ services as per demand
• Facing competition
• It can also be seen that there is opportunity to enhance the business and as there is demand of services and work in the business.

Looking to above factors it would be better for Joe to convert its proprietorship to partnership. By this following benefits would be achieved:-

• Adequate capital
• Additional manpower for working and supervision
• Cost saving as partners would take share in profit that will not part of expense
• As it is small business compliance would be less than company formation.
• Not much participant required.
• Smooth enhancement of business
• Would be capable to face competition

In the second case it would be better to form a company due to following:-

1. It requires to make research and development phase which requires huge money
2. Promoters targeted to go to public within a period of five years which can be possible by way of formation of company
3. To form a manufacturing unit various workers and expert would be required which will be only possible by way of company formation.

Whether more than one company can be formed?

                Yes, more than one company can be formed for the sake of easy operation and focused results. In the current case with following objectives different companies can be formed:-

1. For research and development
2. For manufacturing
3. For distribution and selling in market