CRITICAL THINKING EXERCISE 5-3



critical thinking exercise 5-3

Choosing a Form of Business Ownership

The needs of the businessperson starting a new business are a major consideration when deciding the best form of business ownership. The kind of business being started is also important to consider when deciding to make your new business a sole proprietorship, partnership, or corporation. Look at the list of new businesses below. Indicate the form of ownership you think would be best for each business. Give the reason for your selection.

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|BUSINESS |FORM |REASON |

|Swimming pool | | |

|repair | | |

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|Flower shop | | |

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|Internet-based specialty store | | |

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|Termite control | | |

|service | | |

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|Textbook publishing company | | |

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|Law firm | | |

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|Underwear | | |

|manufacturer | | |

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|Child care center | | |

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NOTES ON critical thinking exercise 5-3

SWIMMING POOL REPAIR

A swimming pool repair company would probably operate best as a sole proprietorship or partnership at first. There is no great need for capital at first, so a partner may not be needed. A good way to start would be to hire a few good people and begin work. If many jobs came in, you could hire more workers. If the managerial task became too much, you could hire an accountant or office manager. A partner would be beneficial if you wanted an expert in marketing or some other assistant. Also, it is often fun to have a partner to share ideas and successes with.

FLOWER SHOP

A flower shop would likely do best as a partnership. This is because retail stores demand that someone be there all the time. Since stores are open as much as seven days a week, 12 hours a day, it helps to have a partner to share the managerial responsibilities. A partner is also helpful in raising the initial capital. A sole proprietor could succeed if he or she found an excellent manager or two to help.

INTERNET-BASED SPECIALTY STORE

The answer to this would depend on the size envisioned for the specialty store. A small seller of a few specialty products could operate as a sole proprietorship, if the owner had the necessary skills. Orders could be taken without human assistance. Initial investment, excluding inventory, would be low. Or the entrepreneur could start by setting up a “shop” on Internet shopping sites such as eBay and , in which the purchasing functions are handled by the larger retailer.

If the store were larger and carried more extensive product lines, the owner would need assistance, perhaps from a partner. Maybe the best choice would be the limited liability partnership. Without limited liability, the owner(s) would be liable for all the business’s debts, and their personal assets would be at risk.

TERMITE CONTROL SERVICE

A termite control service is much like the swimming pool company, a consumer service. One can start out small with little capital and build as the business expands. A sole proprietor can do fine with some good employees. A partner can be of much assistance in marketing and sharing the burden if the business grows rapidly. A partner is good for sharing thoughts and worries and joys, but not necessary.

TEXTBOOK PUBLISHING COMPANY

A textbook publishing company calls for a corporate-type of structure because the costs of publishing a text are so high. The cost of publishing this text plus all the supplements—instructor’s manual, study guide, test bank, videos, computer projects, and so on—could add up to a million dollars or so. It is very difficult for a sole proprietor or a partnership to raise such funds. The production facilities and other physical spaces are subject to accidents that could lead to lawsuits. A corporation protects its owners from losses beyond what they invest. All in all, a corporate form is probably best in this situation.

LAW FIRM

Law firms can be sole proprietorships, but the growth would be severely limited. Besides, there would be no one to cover when the owner gets sick or goes on vacations. In this case, it is best to have a partner or several partners. In fact, that is what most law firms do. Whether or not the partners decide to incorporate has much to do with taxes and liability. The need for capital is not that great.

UNDERWEAR MANUFACTURER

An underwear manufacturer would likely need buildings and equipment that could not be obtained without a lot of capital. That calls for incorporating and raising those funds through the sale of stock. This is much like the publishing case.

CHILD CARE

A child care center could very well be a sole proprietorship if it was small enough. Employees could be hired to do all that was necessary. On the other hand, a partner may be needed to help finance the building, if the building is not rented. A partner could help in many other ways as well: being there when you can’t be, sharing ideas, etc. Incorporation would only be necessary to protect against liability, which can be important, or for tax purposes if the center expands to make lots of money. An S corporation may be a good idea in that case. Of course, a child care center could also be a cooperative if the parents are willing.

ALTERNATIVES

S corporations could be used for the swimming pool company, the flower shop, and the Internet specialty store as well. The entrepreneur could also consider one of the newer ownership formats, such as a limited liability partnership (LLP) or a limited liability corporation (LLC.) The basic considerations are to limit personal liability and to minimize taxes. Such a decision is best left to a small business expert who is also a lawyer or accountant or both.

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