Choosing a Form of Business Ownership [Group Exercise 1]

The needs of the businessperson starting a new business are a major

consideration when deciding the best form of business ownership. The kind of
business being started is also important to consider when deciding to make your
new business a sole proprietorship, partnership, or corporation. Look at the list of
new businesses below. Indicate the form of ownership you think would be best
for each business. Give the reason for your selection. [24 marks]
[1 mark for form and 2 marks for reason]

BUSINESS FORM REASON

Swimming pool
repair

Flower shop

Internet-based
specialty store

Termite control
service

Textbook publishing
company

Law firm

Underwear
manufacturer

Child care center

NOTES ON [GROUP EXERCISE 1]

SWIMMING POOL REPAIR

A swimming pool repair company would probably operate best as a sole

proprietorship or partnership at first. There is no great need for capital at first, so
a partner may not be needed. A good way to start would be to hire a few good
people and begin work. If many jobs came in, you could hire more workers. If the
managerial task became too much, you could hire an accountant or office
manager. A partner would be beneficial if you wanted an expert in marketing or
some other assistant. Also, it is often fun to have a partner to share ideas and
successes with.

FLOWER SHOP

A flower shop would likely do best as a partnership. This is because retail stores
demand that someone be there all the time. Since stores are open as much as
seven days a week, 12 hours a day, it helps to have a partner to share the
managerial responsibilities. A partner is also helpful in raising the initial capital. A
sole proprietor could succeed if he or she found an excellent manager or two to
help.

INTERNET-BASED SPECIALTY STORE

The answer to this would depend on the size envisioned for the specialty store. A
small seller of a few specialty products could operate as a sole proprietorship, if
the owner had the necessary skills. Orders could be taken without human
assistance. Initial investment, excluding inventory, would be low. Or the
entrepreneur could start by setting up a “shop” on Internet shopping sites such as
eBay and Amazon.com, in which the purchasing functions are handled by the
larger retailer.

If the store were larger and carried more extensive product lines, the owner
would need assistance, perhaps from a partner. Maybe the best choice would be
the limited liability partnership. Without limited liability, the owner(s) would be
liable for all the business’s debts, and their personal assets would be at risk.

TERMITE CONTROL SERVICE

A termite control service is much like the swimming pool company, a consumer
service. One can start out small with little capital and build as the business
expands. A sole proprietor can do fine with some good employees. A partner can
be of much assistance in marketing and sharing the burden if the business grows
rapidly. A partner is good for sharing thoughts and worries and joys, but not
necessary.

TEXTBOOK PUBLISHING COMPANY

A textbook publishing company calls for a corporate-type of structure because

the costs of publishing a text are so high. The cost of publishing this text plus all
the supplements—instructor’s manual, study guide, test bank, videos, computer
projects, and so on—could add up to a million dollars or so. It is very difficult for a
sole proprietor or a partnership to raise such funds. The production facilities and
other physical spaces are subject to accidents that could lead to lawsuits. A
corporation protects its owners from losses beyond what they invest. All in all, a
corporate form is probably best in this situation.

LAW FIRM

Law firms can be sole proprietorships, but the growth would be severely limited.
Besides, there would be no one to cover when the owner gets sick or goes on
vacations. In this case, it is best to have a partner or several partners. In fact,
that is what most law firms do. Whether or not the partners decide to incorporate
has much to do with taxes and liability. The need for capital is not that great.
UNDERWEAR MANUFACTURER

An underwear manufacturer would likely need buildings and equipment that

could not be obtained without a lot of capital. That calls for incorporating and
raising those funds through the sale of stock. This is much like the publishing
case.

CHILD CARE

A child care center could very well be a sole proprietorship if it was small enough.
Employees could be hired to do all that was necessary. On the other hand, a
partner may be needed to help finance the building, if the building is not rented. A
partner could help in many other ways as well: being there when you can’t be,
sharing ideas, etc. Incorporation would only be necessary to protect against
liability, which can be important, or for tax purposes if the center expands to
make lots of money. An S corporation may be a good idea in that case. Of
course, a child care center could also be a cooperative if the parents are willing.

ALTERNATIVES

S corporations could be used for the swimming pool company, the flower shop,
and the Internet specialty store as well. The entrepreneur could also consider
one of the newer ownership formats, such as a limited liability partnership (LLP)
or a limited liability corporation (LLC.) The basic considerations are to limit
personal liability and to minimize taxes. Such a decision is best left to a small
business expert who is also a lawyer or accountant or both.