Question

Please, read the following case with care and give your argumentation with clearness and objectivity.

Mr. John decides to start a small business with the intention to expand it in the future. He has some capital, but he fears he may lose some of his personal assets if the business fails. Also, Mr. John is not sure he has enough capital to proceed with a sustainable business. At same time, he has some doubts in sharing the ownership of his business with partners that had not participate in the 'creation of his business project'. Having in mind these issues, advise Mr. John regarding what you consider to be the optimal business type for a saffer and with prospectives of development and maybe sustainable growing business. Argue by comparing the business types that can be considered a viable option.

Answer 1

The ideal business form for an individual for a small business with limited capital can be a sole proprietorship. The individual is the sole owner of the whole business and responsible for all activities profits and losses. He can make all the decisions and wind up the business also if the situation arises without much hassle. But this type of business form cannot be successful if the business needs to grow on a longer-term and more capital needs to be pumped in from time to time. In that case, he can start with a sole proprietorship and later change the business form to a partnership or corporation.

A partnership firm is one where two or more partners invest money, share profits and losses and actively participate in the running of the business. The different types of partnerships can also be considered by him allowing him to only share the profits with the partners or involve them in the decisions and operations too. This form will allow him to share capital investment and thus give more scope of growth.

Another form which he can adapt with his partnerships or shareholder at a later stage of the business is limited liability company. In this form, the personal liabilities of the partners are limited and gives them tax benefits of a partnership. It is a form with more complex formation structure and formalities but gives personal liability advantage.

Once the business grows to a certain level and profit earning becomes constant making the business a large scale one, the owner can change it to a corporation in which he and the other owners are a separate entity from the company. And the corporation can be sued, can sue and sell ownership through stocks.