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You must provide advantages and disadvantages for each of the business structures

Home, - What types of business structures best suitable

Question - You have graduated from Holmes Institute with your Master of Professional Accounting degree. You are working for an accounting firm, and a client has made an appointment to see you about setting up a business.

The client tells you that he is thinking about opening his own computer support business and running his business on his own from his house so that the customers can bring their laptop or PC's to his premises and then repair it.

He also tells you that he is thinking about buying into a franchise called IT Support, and he asks you for advice about what is a franchise and is it a good idea?

Your task is to give the client advice on what types of business structures, including franchises, would be best suitable for him. In your answer, you must provide advantages and disadvantages for each of the business structures you have suggested to him.

Answer - As per the case, the client seeks to set up business of computer support and run business at own home and he can have following business structures as discussed below:-

Sole Trader- Sole proprietorship is operated by one personwho has to bear losses and enjoy profits alone. The establishment of proprietorship does not involve huge fund and give full control over business. There are very least formalities to complete for registration of proprietorship and further very little regulations are to be adhered from local, government and federal. The proprietor also get tax benefit as owner is taxed in form of individual not as business. In order to operate computer repair business, client will require obtaining license. In future the business is needed to be expanded then capital funds may become inadequate as proprietor cannot obtain funds from public except friends, family and banks. Sole proper or will have personal bearing for debts and liabilities leading to risk of unlimited liability. Sole proprietorship may fail to manage business alone and lack efficiency in management skills.

Partnership- Partnership involves the two or more people to collaborate and share ideas, funds, assets and responsibilities with other partners. Partnership will not require to client to file income tax in the form of business entity, each partner will file their own loss or profits on personal income tax return. Partnership bridges the gap of knowledge and expertise and brings more funds for business (Aremu, 2015, pg. 3(3)). There is moral support from other partners and also lead a better life balance for each partner. However, in case of setting off liabilities, the personal assets of partner will be used. In other words, creditor has right to pursue personal assets of partner to compensate for business debts. Each partner will be liable for each other act and any negligence of any partner can be a huge loss to partners.

Joint venture- Joint venture is a venture which combines resources, skills and expertise of two unrelated Companies. It is a temporary agreement which does not involve commitment for long time. Joint Venture help businesses in accessing in new market, tap distribution network, share risk, and increase the capacity which is not possible individually. Joint venture will save huge marketing cost and combine strengths of international brand. Joint ventures do not require looking outside for funds and even help in research and development. However, joint venture is prone to risks in terms of potential disputes, conflicts and non-clarity in the venture objective. The communication with each other, expectations from each other, or difference in legal, culture can be a barrier to venture.

Unincorporated association- This association is easy to form and there is no need of registration. The association require an agreement and between members but no such registration is needed. There is low compliance cost and there is no need to file accounts with registrar. The members or officers of the association may become liable for debts and does not have any separate legal existence like a Company. The association can also not make formal contracts and will be considered as void and null.

Corporation- The foremost benefit of starting business as company is having limited liability. In other words, the liability of shareholders, owners and directors does not exceed the investment they have made. The Corporation can even go to public to raise large funds by issuing bonds and stock and also get listed on stock market which can be used to further expand business and manage obligations. Corporation pays a flat rate of tax and need to file tax return with revenue authorities. Moreover, Corporation bears huge laws and regulations which need to be complied time to time to avoid fine, penalties and loss of reputation. Corporation also need to report and be transparent with shareholder which dilute the control of business. The decision making in the corporation involves a long process as there is need to consider the approval of shareholders in especially in significant business transaction before finalising the decision between board members.

Franchise- Franchise is a buying of rights on brand from franchisor.It is a grant of authorization to carry particular business activities. Franchise is basically acting as an agent of other Company products. The franchisee is required to pay initial fee as franchise and also regular franchise fee to franchisor and additional required paying royalties, marketing and many more.

In the case, client wants to take franchise called IT support which has following advantages and disadvantages:-

Advantages

Franchise provides business assistance from franchisor to franchisee. The franchisor will supply equipment, plan for advertisement, supplies and everything to operate a business. A big advantage of franchise is to enjoy the wisdom of knowledge of other business, brand recognition, established customer for business to start from group up(Nijmeijer et al. 2014, pg.2(1)). There is very slight chance of failure of franchise as brand is already popular and successful in the market. Franchise provides a better size of network. It has been observed that franchise give good profits than for new business and high return on investment. The franchisee also is an own boss and also get equal support from franchisor.

Disadvantages

Franchise also gets some restrictions from franchisor and need to follow rules, restrictions as provided in the agreement. The cost of franchise may be costly for small business and also involve further ongoing payment of royalties and other cost. There is also lack of privacy in finance. Franchisor can oversee the ecosystem of franchise and can be issue of conflict in future.

At initial level, sole proprietorship is best option for client to save funds and establish a new business. Later, after two three months client can choose joint venture to tap the unknown market and get the help from the existing established brand to get right skills and expertise and grow in right direction. Alternatively, client can also opt for franchise which can give many established customer of other brand and also knowledge to grow in software market.

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