Question

Alvin is a successful sole practitioner offering business consultancy services to a number of local companies. His chief competitor is Betty, who offers similar services. Betty and Alvin decide that they wish to work together, but are not sure as to which business structure would be most appropriate. They seek your advice regarding which business structure would be most suitable, bearing in mind:

• they wish to avoid many formalities and regulations;

• they expect to have flexibility in establishing the procedures by which the business is to be run;

• they want to be able to run their private affairs at the same time;

• they do not want to incur personal liabilities for the debts of the business;

• the business can be set up in a relatively cheap and quick manner;

• they do not want to put in large amounts of their own capital in setting up the business and will probably wish to raise capital from outside sources;

• they wish to take on employees.

Discuss to what extent the various business structures fulfil all, or some, of the above aims and advise Alvin and Betty which business structure would be most suitable for their business. (600 words)

Answer 1

Choosing a business structure is of utmost importance while starting a business. The selected business structure would affect the smoothing functioning. It will have impact on the taxes, legal and other procedural aspects, raising of funds etc. While Starting a business one should select a structure that is best suited for their business. The various business structures commonly in practice are ;

1. Sole Proprietorship

2. Partnership

3. Limited Liability Partnership

4. Company or Corporation

Each of these have its own pros and Cons.

Sole proprietorship

A sole proprietorship is easy to form. It gives full control of the business. It doesnot create a separate business entity. The owner and business are not separate from each other. Thus, the owner shall be held personally liable for the obligations and debts of the business. It is difficult to raise money in this form of business.

This form of business structure can be best suited for low risk business.

Partnership

Partnership is an agreement between two or more persons to carry on the business and share the profits or losses together. Partnership agreements shall put forth the profit sharing ratio,liabilities and other details such as interest on loan, interest on drawings etc. The partners and firm are not separate from each other. The liabilities of the partners may be limited or unlimited. The same shall be laid down in the agreement.

This form of business structure shall be best suited for those businesses with multiple owners, professional groups etc.

Limited Liability partnership

This is similar to partnership except that the liabilities of the partners may be limited. The Limited liability partnerships are constituted as per the Limited liabilties Partnership Act that is prevalent in each country. The partners and entity are different from each other. There isn't minimum requirement of capital to start a LLP as compared to that of company. The procedural and legal obligations are also less compared to that of the company.

This form of business is best suited for medium or higher risk businesses.

Company or Coporates

The company or a corporate are formed as per the Act prevalent in each country. The company has a separate Lal entity and its distinct from that of its members. The liability of the members are limited. The company have its own separate name and legal entity. Funds can be easily raised from Public at large in this form of business structure. THowever, the legal and procedural aspects are more when compared to other forms of business structure.

This form of business structure shall be best suited for high risk businesses and those business which requires a large amount of capital.

Conclusion:

From the above factors let us see which among the above discussed business structure would be suitable for Alvin and Betty. Alvin and Betty are looking for a business structure that would meet he following criteria :

• they wish to avoid many formalities and regulations;

• they expect to have flexibility in establishing the procedures by which the business is to be run;

• they want to be able to run their private affairs at the same time;

• they do not want to incur personal liabilities for the debts of the business;

• the business can be set up in a relatively cheap and quick manner;

• they do not want to put in large amounts of their own capital in setting up the business and will probably wish to raise capital from outside sources;

• they wish to take on employees.

The best suited business structure for Alvin and Betty bearing in mind their requirements would be Limited Liability Partnership. The reasons why LLP would be most suited for Alvin and betty are :

1) In an LLP the entity has a separate legal entity. Thus, The liability of the partners would be minimum.

2) The legal formalities and regulations less.

3) There will be flexibility in establishing their procedures.

4) The partners would be able to run their personal affairs at the same time.

5) Since the firm and partners are distinct from each other the partners won't incur personal liabilities for the debts of the business. Their liability would be limited to the agreed upon contibution of each patner.

6) There is no limit to the number of partners. They can easily generate fund if there are more partners.

7) Business can be set up easily and quickly.

8) They can easily employ employees.

From the above factors it is clear that the Limited Liability Partnership is the most suited form of business structure for Alvin and Betty. They can opt Company form of business structure too. But the legal formalities and regulations would be more compared to the LLP.