Case Analysis

Abakada Company

by: Kristine Gale M. Cabahug

Irene Joy D. Dumayaca
I. Background of the Case

A. Facts

Abakada Company is a small enterprise that started by buying and selling various food
products. Over time, it expanded its product line to include apparel and footwear. The proprietor
managed the business on the basis of his capital and borrowing from the bank. However, as the
business grew, Abakada needed to borrow larger amounts of funds from the bank and hire more
personnel for marketing and administrative functions. The proprietor is now considering whether
to incorporate the business or not. He is aware that incorporating the business would provide
greater access to funds, especially larger loans from banks. However, he is also concerned about
losing control of the business and possible conflicts among shareholders if he offers ownership
shares to other people outside his family. The proprietor has sought advice to determine whether
incorporating the business is the best course of action. The proprietor is considering whether to
incorporate the business or not.

B. Issues

● Should Abakada incorporate its business to have greater access to funds, especially larger
loans from banks?
● If the business expands, will the proprietor be able to manage and control the personnel
working for him?
● If the proprietor offers ownership shares to other people outside his family, will serious
disagreements arise among them in terms of products and services to offer in the future,
as well as managerial style?

II. Statement of the Problem

The proprietor of Abakada Company is considering whether to incorporate the business

to access larger loans from banks and sustain its growth. However, he is concerned about losing
control over the business and potential conflicts among shareholders if he offers ownership
shares to other people. What is the best course of action for the proprietor of Abakada Company
given the issues related to business size, mission and objectives, personnel, control, funding
sources, and legal and tax considerations? Should he incorporate the business to access larger
loans from banks and sustain its growth, or should he explore other funding sources and maintain
control over the business? How can he ensure that the business can continue to operate smoothly
and that everyone is working towards the same goal, while complying with all the necessary
regulations and requirements?

III. Three Objectives

 ● To evaluate the potential benefits and drawbacks of incorporating Abakada Company in
terms of accessing larger loans from banks, reducing personal liability, and attracting
investors, within one week.
● To identify and assess alternative funding sources and their feasibility in meeting the
business's financial needs while preserving the proprietor's control and vision, within two
weeks.
● To develop a strategic plan for Abakada Company that aligns its mission, objectives,
products, services, and personnel with the proprietor's values and goals, and ensures
compliance with legal and tax requirements, within one month.

IV. Three Alternative Courses of Action

A. Incorporate Abakada Company

● Pros:
○ Limited liability for shareholders
○ Greater access to funding sources, including larger loans from banks
○ Easier transfer of ownership
○ Possibility of attracting new investors
● Cons:
○ Costly and time-consuming process
○ Increased regulatory requirements and compliance costs
○ Loss of control for the proprietor if he offers shares to other investors
○ Risk of conflicts among shareholders

B. Continue as a sole proprietorship or partnership

● Pros:
○ Simple and easy to manage
○ Full control for the proprietor
○ Lower costs and fewer regulatory requirements
● Cons:
○ Unlimited personal liability for the proprietor or partners
○ Limited access to funding sources
○ Limited potential for growth and expansion

C. Establish a limited liability partnership

● Pros:
○ Limited liability for partners
○ Fewer regulatory requirements and compliance costs compared to incorporating
○ Partnership structure allows for flexibility in management and decision-making
● Cons:
 ○ Limited access to funding sources compared to incorporating
○ Risk of conflicts among partners
○ Less attractive to investors than a corporation

V. Conclusion and Recommendation

After considering the pros and cons of the three alternative courses of action, it is
recommended that Abakada Company should incorporate its business. The advantages of limited
liability, greater access to funding sources, and easier transfer of ownership outweigh the costs
and potential risks of incorporating. The proprietor should carefully consider the risks of loss of
control and conflicts among shareholders and establish clear governance structures and policies
to manage them. The proprietor should also seek the advice of a lawyer and an accountant to
ensure compliance with regulatory requirements and tax implications.