Bautista, John Ivan S.

BSA-4A
Assignment in Financial Management Chapter 4

1. a) SOLE PROPRIETORSHIP
The sole proprietorship is the simplest organizational structure and the
most common startup choice for small businesses, according to the Small
Business Administration. One person owns the business and likely runs the
day-to-day operations. Sole proprietors have complete control of the
company, within limits of the law, and receive all income to spend as they
wish or reinvest in the business. Taxation is simple. Income is reported on
a personal return, and business deductions are itemized on IRS form
Schedule C: Profit or Loss From Business. Yet, besides income tax, any
profits are subject to self-employment tax. Sole proprietors also face
unlimited liability and responsibility for all debts against the business, with
all business and personal assets at risk.
ADVANTAGES OF SOLE PROPRIETORSHIP
➢ Less paperwork to get started.
➢ Easier processes and fewer requirements for business taxes.
➢ Fewer registration fees.
➢ More straightforward banking.
➢ Simplified business ownership.

DISADVANTAGES OF SOLE PROPRIETORSHIP

➢ No liability protection.
➢ It's harder to get financing and business credit.
➢ It's harder to sell your business.

b) PARTNERSHIP
Partnerships are similar to sole proprietorships in that the IRS does not
differentiate between business and personal income. They are also easy to
set up, but because ownership is shared, negotiating an operating
agreement between the partners is highly advisable. Partnerships can have
a better chance of raising startup funds, both by the money each partner
brings to the business and the ability to attract other funds. Each partner
can also bring complementary talents and expertise to help run the
business. Disadvantages include sharing of profits and the potential for
critical disagreements in shared decisions.
ADVANTAGES OF PARTNERSHIP
➢ Ease of Formation
➢ Additional sources of Capital
➢ Management base
➢ Tax Implication
DISADVANTAGES OF PARTNERSHIP
➢ Unlimited Liability
➢ Lack of continuity
➢ Difficulty of transferring ownership
➢ Limitations in raising capital

c) CORPORATION
A corporation is recognized by the state and by the IRS as an entity
separate from its shareholders, so shareholders have only a liability for
company debts limited by the size of their investments, though company
officers can be held personally liable for their actions by the courts. A
corporation can sell stock to raise funds. But a corporation takes more time,
money and paperwork to meet state and federal laws. Dividends paid to
shareholders cannot be deducted from business income, so profits are
taxed twice, once for the company’s income and again for each
shareholder’s dividends.
ADVANTAGES OF CORPORATION
➢ Limited liability
➢ Unlimited life
➢ Ease in transferring ownership
➢ Ability to raise capital
DISADVANTAGES OF CORPORATION
 ➢ Time and cost of formation
➢ Regulation
➢ Taxes

2. A sole Proprietor could raise capital by issuing equity to another

investor. A partnership could raise capital by often changing into a
public corporation. A corporation is able to raise incredible amounts of
money by selling stock and borrowing money.

3. When the founder wants the business to grow quickly, more capital is
required. In the early stages of a small fast growing company, it is
equity capital that is available. In other words, the founder must give
up a portion of his/her ownership to other investors.

4. When the founder wants the business to grow quickly, more capital is
required. In the early stages of a small fast growing company, it is
equity capital that is available. In other words, the founder must give
up a portion of his/her ownership to other investors.

5. Operating a business of any size is a complex undertaking. In addition

to day-to-day responsibilities, your company must engage in long-
term planning, develop new products or services, streamline
production or delivery and locate new customers while serving
existing clients. Running a shop on instinct no longer suffices.
Statistics provide managers with more confidence in dealing with
uncertainty in spite of the flood of available data, enabling managers
to more quickly make smarter decisions and provide more stable
leadership to staff relying on them.

6. In general, companies go international because they want to grow or

expand operations. The benefits of entering international markets
include generating more revenue, competing for new sales, investment
opportunities, diversifying, reducing costs and recruiting new talent.

7. The first few important questions a firm has to answer are should a
company go for international market? Why should a company prefer to
enter global market? Does company capable to transact in
international markets? Obviously, answers come from company’s
 current domestic market position and types of opportunities available
in the foreign markets. When international markets seem to more
attractive and the company is capable to exploit these markets, the
company decides to enter the international markets.

8. ADVANTAGES OF OUTSOURCING

• improved focus on core business activities - outsourcing can free

up your business to focus on its strengths, allowing your staff to
concentrate on their main tasks and on the future strategy
• increased efficiency - choosing an outsourcing company that
specialises in the process or service you want them to carry out for you
can help you achieve a more productive, efficient service, often of
greater quality
• controlled costs - cost-savings achieved by outsourcing can help you
release capital for investment in other areas of your business
• increased reach - outsourcing can give you access to capabilities and
facilities otherwise not accessible or affordable
• greater competitive advantage - outsourcing can help you leverage
knowledge and skills along with your complete supply chain

Disadvantages of outsourcing

• service delivery - which may fall behind time or below expectation

• confidentiality and security - which may be at risk
• lack of flexibility - contract could prove too rigid to accommodate
change
• management difficulties - changes at the outsourcing company
could lead to friction
• instability - the outsourcing company could go out of business

9. Shareholders are the owners of the Company and the Board of

Directors are the working body having specialized individuals with
expertise in various fields. The Board of Directors of the Company
should decide the compensation of CEO on the basis of the working of
the Firm under his proper guidance. The CEO compensation should
be planned in such a way that the CEO should only be rewarded on
the basis of performance of the stocks of the Firm. The compensation
 package should not be determined on the basis of the price of the
Firm’s stocks. Consequently, the Options (or stock rewards) should be
segmented in over a number of years, it will act as an incentive for the
CEO to maintain the stock price always higher over time. The method
of determining the intrinsic value of a stock is very difficult and not
always correctly measured. In view of the same, if stock’s intrinsic
value could be ascertainable.

10. Useful motivational tools that will aid in aligning stockholders' and
management's interests include: (1) reasonable compensation packages,
(2) direct intervention by shareholders, including firing managers who
don't perform well, and (3) the threat of takeover.