BUS503: Environment and Business

Case:

Types of Business Organization

Submitted to:

Dr. Akbar Ali Khan

Course Instructor

Submitted by:

Noushin Wadud Khan

20164095

June 19, 2021

ANSWER 1

Analyzing Ashfaque’s business and its requirements, we can outline the strengths and
weaknesses of the different types of business organizations as follows:

Sole proprietorship:

For an export import business, sole proprietorship presents some benefits as well as some
drawbacks. Having a single decision maker is beneficial since transactions costs such as
bargaining and decision costs can be eliminated partially by avoiding the necessity to involve
other decision makers and lengthy discussions, it will also help to keep policing and enforcement
costs low as Ashfaque only has to police himself and his employees as opposed to an additional
group of owners/decision makers. The drawback however is that transaction costs may be
increased due to some search cost and information cost pertaining to finding the right buyer and
making a good deal when purchasing, as well as in securing cost effective capital. While no
search or information cost is incurred in vetting partners, the cost will be rather incurred in
looking for and finding quality information about business opportunities and in looking for the
right information. In this regard the manager may be a help, but the case presents us with no
information about the experience of the manager or of the role he played in the business while
run by Ashfaque’s father.

Sole proprietorship is a risky form of business, as is an export import business. The case does not
tell us whether Ashfaque is looking to import refined or unrefined soyabean oil. The nature of
the product plays a part in how risky the venture is. In either case Ashfaque needs to consider
how long it will take to confirm the order, import it and sell it to get the cash back into the
business. In addition, if Ashfaque is looking to import unrefined soyabean oil, he also needs to
consider the incremental expense that will be incurred in refining it and the storage cost of the
oil.

Being a sole proprietorship has benefits such as low taxes, quick decision making, and low legal
compliance issues. These are all benefits that Ashfaque can enjoy in the current business type.
However, the drawbacks of sole proprietorship, such as access to capital and attracting talented
employees is something Ashfaque should consider. The case already tells us Ashfaque has access
to 100crore in capital, which is sufficient for investing 60crore in the soyabean import. So capital
is not an issue for Ashfaque here, rather the quality of employees may be a cause for concern.
Also, although Ashfaque himself is not a business student he has access to his businessman uncle
and presumably has also gained some knowledge of the family business from his father, so
Ashfaque can also capitalize on this network and his knowledge to run the business successfully.

Lastly, an export-import business inherently does not need a large structure, or many employees,
they need few but effective employees. If the management and employees are knowledgeable
and have sufficient experience a sole proprietorship can be run successfully.

Partnership:

Like a sole proprietorship a partnership also has some benefits and drawbacks. In this context,
we see that Ashfaque’s friends have offered to form a partnership with him to help run the
business left by his father. Ashfaque’s friends are wealthy but we do not have any information
about their occupation, including whether any of them have any experience in soyabean oil
business or export import business. While the nature of the business is just as suitable for a sole
proprietorship as it is for a partnership, the composition of partners may have a beneficial or a
detrimental effect on the business. A partnership would be relatively easy to set up, since
Ashfaque already has people willing to be partners. Moreover, the partnership would enable him
to access larger capital (from his friends), potentially attract better talent all the while paying low
taxes as the business used to. Furthermore, his friends, if they have any business experience,
would be able to help him to make better decisions that will help the business run more
effectively. Also, having a larger capital will allow Ashfaque to engage in multiple ventures at
the same time which would have not been possible before.

On the other hand, being in a partnership is sure to increase transaction costs. While Ashfaque
will not have to spend too much time and effort searching for partners, he should spend sufficient
time and effort to understand the financial condition of any potential partners as well as get an
understanding of their knowledge and experience in this line of business. Usually, with friends it
is difficult to maintain truly professional relationships therefore, bargaining and decision-making
costs will be increased significantly as well as enforcement and policing costs. Previously all
decisions could be made by a single individual, but now since more decisions makers are
involved this will increase the time and complexity of decision making. In addition, rules and
policies will have to be put in place to govern the roles of each partner, and their level of
authority. This will be difficult to maintain unless enforced. This it is possible that manpower
will be needed for these tasks making the overall operations more costly in the long run. If any of
the partners are not financially solvent, it may put a strain on the business. Each partner will have
a different risk appetite thus many ventures may not be possible, as decisions will have to be
acceptable by all. Moreover, Ashfaque will then also be responsible for bad decisions of his
partners in addition to his own mistakes. Repeated mistakes may result in Ashfaque losing his
capital, in trying to maintain the partnership.

Limited Company or Corporation:

If Ashfaque were to convert the organization into a corporation, there are several benefits that he
can enjoy. Firstly, he will be able to take on larger risk as the risk of a corporation is not
primarily on the management, rather primarily on creditors. He will be able to get capital at
cheaper rates from banks or other financial institutes to engage in projects with higher potential
for returns. Having a larger and more organized company will also enable him to attract better
talent and get better information from a team rather than having to depend on limited sources.
With more capital Ashfaque will be able to engage in multiple projects which would not have
been possible as a sole proprietorship.

The drawback of a corporation starts with the time and cost that will be incurred in setting up the
company. Whether the company is set up as a private limited company or public limited
company there are several legal procedures that must be completed and many requirements to be
fulfilled to be a corporation. As per the rules of Bangladesh, Company Ain 2004, 2 members are
sufficient to form a private company, and while Ashfaque may chose his sisters, their spouses,
his uncle or friends to be board members of the corporation, each individual will have to be
vetted, and transaction costs associated with information and search of data on the process as
well as individuals will be quite high. All of this will take a significant amount of time, during
which the market scenario may change, the supplier may sell his soyabean oils or prices may
increase or demand may fall. As with partnerships, the transaction costs of corporations although
potentially reduced due to more experience and better network, are increased due to higher
policing cost, enforcement cost, decision making cost and bargaining cost. Another significant
drawback of the corporation is that Ashfaque and the company will have to pay significantly
higher taxes, they will first pay taxes as a corporation and later pay income taxes, effectively
being taxed twice. Lastly as a corporation to handle the larger operations, the increased rules and
policy conformance and enforcement, more personnel will be needed making the operations
quite a costly one. Given the business type, and the scale of the business at this point, a
corporation is not a suitable organizational type for Ashfaque’s business.

ANSWER 2

The current business is in a sole proprietorship model that started with Ashfaque’s father and
now Ashfaque being the only owner and primary decision maker for the business. The proposal
of importing soyabean oil is one of many avenues open to Ashfaque. Without any details on the
prior business of the company, it is not possible to judge how much knowledge Ashfaque or the
manager has about the soyabean oil business. If this was their business previously, Ashfaque
should put trust in his father’s choice of hiring the manager and continue with a sole
proprietorship and go on to import the soyabean oil as suggested. However, if the business was
previously focusing on something else, Ashfaque should first take some time to understand the
soyabean business before investing such a large sum in the soyabean oil import.

Ashfaque should treat this venture as a project for the time being, and to make quick decisions
and act quickly keep the company as a sole proprietorship. Since the business is already
established as such, no time or effort or cost needs to be expended in changing the nature of the
business from sole proprietorship to any other. Given the time needed to incorporate a
partnership or corporation, staying a sole proprietorship is the most sensible path. Moreover,
being a sole proprietorship business means the business will not have to pay heavy taxes, or
incur other legal fees associated with other forms of businesses. At the current juncture Ashfaque
does not need additional capital, and he has sufficient manpower available to him to run the
business at the scale at which it currently stands. The warehouse and few employees in the
business are enough to import the soyabean oil and then sell it.

Although Ashfaque lacks in experience, he can take help from his uncle in learning about
managing a business. He can also take help from the manager, and Brac University, his alumnus
to help him learn more about the business and take more informed decisions going forward.