Sally Gomez is interested in starting a new business. Although Gomez has develop

Question

Sally Gomez is interested in starting a new business. Although Gomez has developed her business plan and is ready to implement her ideas, she lacks the necessary finances to begin her new business. Along with a lack of finances, Gomez worries about the potential liability involved with starting a new business. Gomez would hate to lose all that she has personally accumulated to date in the event of a successful lawsuit against her. She is considering a sole proprietorship, a partnership, or a corporation as the organizing structure of her new venture. Which type of business would best serve Gomez's needs at this given time? Which type of business structure would be the worst?

Explanation / Answer

A new business can be formed with different structures. Som popular structures are:

1. Sole proprietorship

2. Partnership

3. Corporation.

1. Sole proprietorship: As the name implies it is an organization with one proprietor or owner. He has to collect entire capital needed to run the business. Also he has to bear the entire risk. In the event of failure of the organization sole proprietor will be responsible to repay them. His libility is unlimited. His personal properties will be used to repay them. But in case of success entire profit will go to the proprietor.

2. Partnership: It is an association of a limited number of persons. Here number of owners should be more than one. Maximu number of owners is also limited and guided by the act. Since owner is more than one collection of capital is a little easier than sole proprietorship. Also risk is comparatively less. Here also partners have unlimited risk. There personal properties can be used to repay debt. But this risk is shared among the partners according to their profit sharing ratio.

3. Corporate: It is the largest form of structure. Here number of owners are many. If it is a public limited company then maximum number of proprietor is unlimited. Here owners are known as shareholders. Total capital requirement is divided into many equally valued shares. Any person can buy a specified number of shares according to his capacity and becomes the shareholder of the company. In this manner it is possible to collect any amount of share capital required to run the business successfully. Also liability of a shareholder is limited to the extent of face value of shares owned by him.

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Now consider the current scenario as stated in the problem. Sally Gomez wants to strart a new business> Since idea is new it is very risky. Chances of its failure is high. It requires a large amount of capital. He does not own adequate money to satisfy the capital requirements. He does not want to lose his personal property in this process. Considering the nature of business sole proprietorship structure will be worst for him. Reasons are as follows:

1. He is the single owner. He does not own adequate money to run the business. So he has to borrow the money. As the idea is new borrowing will be difficult. Even if it is possible, interest rate will be high to cover the risk. Thus aggregate risk will incrrease. Without such borrowings the business may collapse due to lack of capital.

2. As a single owner entire risk will rest on him. His liability will be unlimited. In case of failure his personal properties will be used to repay the debt. Thus he may loss entire money he has saved in this process.

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Best structure will be corporate. Reasons are as follows:

1. Due to unlimited number of shareholders it is possible to collect any quantity of capital required to run the business. Thus necessary finance will be easy to get.

2. Also risk of a corporate structure is normally limited to the extent of face value of share held by a shareholder. Thus personal property will not be taken away under any ciurcumstances to repay the liabilities. Thus accumulated fund of Mr Gomez will remain unaffected.

Conclusion: Corporate form is the best one and Sole propreietorship is the wirst one.

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