Question

Continuing Cookie Chronicle
CCC1 Natalie Koebel spent much of her childhood learning the art of cookie-making
from her grandmother. They spent many happy hours mastering every type of cookie
imaginable and later devised new recipes that were both healthy and delicious. Now at
the start of her second year in college, Natalie is investigating possibilities for starting
her own business as part of the entrepreneurship program in which she is enrolled.
A long-time friend insists that Natalie has to include cookies in her business plan.
After a series of brainstorming sessions, Natalie settles on the idea of operating a cookie making
school. She will start on a part-time basis and offer her services in people’s homes.
Now that she has started thinking about it, the possibilities seem endless. During the fall,
she will concentrate on holiday cookies. She will offer group sessions (which will probably
be more entertainment than education) and individual lessons. Natalie also decides
to include children in her target market. The first difficult decision is coming up with
the perfect name for her business. She settles on “Cookie Creations,” and then moves on
to more important issues.
Instructions
(a) What form of business organization—proprietorship, partnership, or corporation—
do you recommend that Natalie use for her business? Discuss the benefits and weaknesses
of each form that Natalie might consider.
(b) Will Natalie need accounting information? If yes, what information will she need and
why? How often will she need this information?
(c) Identify specific asset, liability, revenue, and expense accounts that Cookie Creations
will likely use to record its business transactions.
(d) Should Natalie open a separate bank account for the business? Why or why not?
(e) Natalie expects she will have to use her car to drive to people’s homes and to pick
up supplies, but she also needs to use her car for personal reasons. She recalls from
her first-year accounting course something about keeping business and personal assets
separate. She wonders what she should do for accounting purposes. What do
you recommend?

Answer 1

Natalie has three options to select from to form her cookie-making school “cookie creations”. The most preferred option for Natalie is a proprietorship as she is planning on a part-time business whereby she will be going to the client's locations and offer her services at people’s homes.

A sole proprietorship is where a single owner will operate the business. A partnership is similar to proprietorship but it is owned by two or more people. A corporation is a legal entity, which considers the owners as a separate entity.

Natalie should consider single proprietorship as it is the simplest form of business. It does not require filing separate documents as its considered one entity. Al income, taxes, and losses are considered part of the single owner's income. The single owner can start with small investments and can enjoy the profits alone. Natalie is also empowered to enjoy the profits alone. The disadvantage is that she is personally liable for everything concerning “cookie creations”. If the company owes anyone anything, she will have to pay back and her assets and business assets are not considered separately. There is no liability protection for Natalie. There is a risk to her assets.

The partnership is similar to a sole proprietorship in terms of liability and liability protection. The risk is divided between the partners and is equally responsible for the risk associated with the business. The partners can though draw up an agreement indicating which partner has how many shares in the business and profits. The partners are responsible to file returns as part of personal income. They also have no liability protection. This option is not suitable for Natalie as she will be running the business alone and does not have a co-owner to become a partner.

The corporation is a separate legal entity. It requires filing articles of incorporation in the state where the corporation will conduct its business. The corporation has shareholders and will be entitled to profits to the extent of their shareholding in the business. The shareholders can elect a board of directors to manage the business. A corporation will pay taxes on profits. The profit after taxes is given to shareholders who again pay income tax on the profit as the corporation and owner are separate business entities. The personal assets of shareholders are not subject to the liabilities of the corporation.

The business Natalie plans to start is small and part-time whereby she will be managing the business alone at her convenience. A corporation is more suitable for a large scale business with many shareholders.

To conclude Natalie should opt for a single proprietorship though she will be personally liable for the business she will also be getting 100% profits for herself and will not have to create a separate legal entity. She can also avoid double taxation on profits and returns as a corporation is considered a separate entity. The scale of her business is small and she can easily manage all activities and functions single-handedly.

Answer 2

Will natalie need accounting information?if yes , information need and why ?how often will she need this information