Advantages and Disadvantages of Sole Proprietorship - Essay Example

Assignment It is worthwhile to mention that Katy has a relatively better idea to initiate her personal furniture business as she could invest a considerable amount of 250,000 pounds. Indeed, commencing one’s own business is more feasible than investing this money in financial markets by purchasing bonds, stocks, saving certificates etc. Indeed, the reason behind this is the fact that today’s corporate world is highly unstable that in turn affects the financial markets. Secondly, low interest rates has also reduced the yield on financial products, hence income generated in above mentioned products may not be up to one’s expectations. As far as furniture business is concerned, it should be highlighted that people tend to purchase furniture (including dining tables, bedroom sets, cupboards, chairs, book shelves etc) for their households; therefore, the demand for furniture products is relatively inelastic and will exist because it is a human need. However, the purchasing power of a customer could affect the demand of designed and branded furniture products. In more simple words, Katy who is adept in designing and marketing should opt to commence her own business in the light of following costs and benefits analysis of each available business option including Sole Proprietorship, Partnership, Limited liability partnership and Company formation. Katy could definitely make a rational business decision after reviewing the mentioned recommendations. Advantages and Disadvantages of Sole Proprietorship: The first major benefit of sole proprietorship (that refers to ownership of a firm by a single person) is that she could easily establish this business by leasing or renting a medium sized building in an industrial estate on the outskirts of the city center. Indeed, there are no real barriers to entry such as licensing, documentation and approval from government. Rather, she has to just obtain a National Tax Number to pay taxes on income generated from her business. Another benefit of this option is that she would be independent in taking her decisions regarding store design, layout, display, product range, catalogues and quality, pricing strategies including sales discounts and other incentives, marketing and advertising campaigns, management / administration within her showroom, after sales services and other key decisions. Indeed, she could be influenced in taking above mentioned decisions if she is involved in partnership with her friends or peers. Another benefit of choosing this option is that she will enjoy 100% profits earned from furniture sales. Since, she has personal interest in designing, she could easily design products that are demanded by potential customers and that fulfill their tastes and preferences. Lastly, Kate could easily shut down her business in case she analyses that the probability she would reap profits is low compared to chances of incurring monetary losses. However, one of the most important disadvantages of 100% ownership is that she would be responsible for all the losses in case she failed to entice customers towards her products because of any reasons such as poor management, higher prices, use of low quality wood and furniture products, weaknesses in designing etc. In short, the owner at one extreme has unlimited liability while on the other extreme has an opportunity to enjoy 100% profits. Another demerit of choosing this option is that she may face problems in management, decision making and problem solving during business operations in absence of any reliable partner who will also have some money at stake if she goes for partnership or setting up a company. Perhaps, if she has the skills of handling her business operations alone then her chances of success will be higher. Advantages and Disadvantages of Partnership: The first major advantage of Partnership is that Kate would receive additional funds from interested partners that could be utilised in further present investments in furniture showroom as well as could be saved for future expansion if her business grows. The second merit of choosing this option is that she could receive advices, suggestions or recommendations during decision making and problem solving that in turn will enhance internal efficiency, effectiveness and performance. In addition, partners will also use their personal skills and abilities besides using their social networks and contacts for advertising and marketing their furniture products. This will be quite helpful in ensuring growth and success as more partners will be involved in marketing the products thereby attracting people towards their furniture showroom. Kate could take Michael into her business despite the fact he will not invest lore than 10,000 pounds in business. She could make Michael the partner of 25% if he agrees to take responsibility of looking after financials, book keeping, legal matters, website designing (internet marketing) and implementation and maintenance of information system within her furniture showroom. She should be worried about Michael’s conduct as he will serve as a partner plus investor and will be responsible for key management tasks. Indeed, 95% of total amount has to be invested by Kate in this case so again she will have unlimited liability. In other words, she will be responsible for all losses if her venture fails to attract customers. However, it should be emphasised that Kate will at least share responsibilities by dividing tasks between Michael and herself despite the fact she will invest almost all the amount. In contrast, she will not only have to invest total figure of 250,000 pounds in sole proprietorship but also will have to manage all routine operations. In addition, the probability that conflicts will occur between two partners is low as both Kate and Michael will pay attention to their specific areas of expertise and interest that are already discussed before. Hence, it could be concluded that Partnership would be a much feasible option in comparison to Sole Trader. Advantages and Disadvantages of Limited Liability Partnership: Kate could also use Limited Liability option through which she could raise small investments from various individuals who have an inclination to own some stake and share risks in anticipation of profit sharing. Kate would then have to serve as a manager because she will garner funds for her furniture showroom business and involve in marketing and selling her products. Members may also involve in management or administration. The profits earned have to be disbursed among all the members who will invest in this type of partnership in ratio of their investments. In addition, she will also enjoy limited liability that means she will not be held responsible personally for any debts or investments made by interested parties if her business venture is unable to survive and observe growth unlike in previous what happens in two previously discussed options. However, a disadvantage of this choice is that she will have to fulfill the criteria set by government for registration and legal documentation, which is a comprehensive process. Secondly, she may lose control over management because investors may come up with own suggestions and recommendations that may or may not be feasible for business growth and goal accomplishment. The termination of this process (exit) is again a lengthy procedure since Kate has to again file an application to government for business closure after which legal process kicks off. Advantages and Disadvantages of Company: Setting up a private (or public) limited company is again an in-depth and comprehensive process that requires many legal formalities regarding registration, corporate tax number and termination in United Kingdom. For instance, Kate does not have any past business experience so it may not be pragmatic to establish a private (or public limited) company and handle all business and legal affairs related to workers’ safety, fringe benefits, medical and health insurance etc. In addition, she could easily establish a small scale furniture business by making use of 250,000 pounds because she does not have any plans to purchase her own property for setting up an outlet at City Center. She will not be required to sanction loans from financial institutions at initial stages, hence formation of a registered company is only feasible for those who are interested in establishing a medium scale business of 30 -100 workers. In contrast, she will only need 3 additional workers who will be hired once she rents out the building and commences her showroom operations. Concluding the above, it is worthwhile to mention the fact that Kate has an opportunity to form a partnership agreement with Michael who is keen to invest 10,000 pounds as well as ready to offer his services in finance and information technology areas. It is, therefore, advised / recommended to Kate to choose Partnership option because this is so far the most reasonable option than sole proprietorship, setting up a company or limited liability partnership. Sources: No author “Limited Liability Partnership Incorporation and Names” Companieshouse.gov.uk Available at http://www.companieshouse.gov.uk/about/gbhtml/gpllp2.shtml No author “Legal structures: the basics” Businesslink.gov.uk Available at http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073789609&type=RESOURCES   No author “Limited Liability Partnerships” Companieshouse.gov.uk Available at http://www.companieshouse.gov.uk/infoAndGuide/llp.shtml Kurtz, Louis and David Boone. Contemporary Business. The Paramount Publishers. 11th edition 2003. Read More