General Information about “Salty Pawz “ The business was established in 2010 as
ID: 351778 • Letter: G
Question
General Information about “Salty Pawz “
The business was established in 2010 as a sole proprietorship. Wanda has been claiming all of the income and expenses for her business on a Schedule C of her personal income tax return. She uses a CPA to prepare her taxes, but maintains the day-to-day bookkeeping herself. Salty Pawz has shown a profit since 2011.
Salty Pawz currently operates out of Wanda’s home in North Carolina, and has had her kitchen certified by the local health department as a commercial kitchen.
She does not currently need a business license because all of her product is shipped and she has no customers coming to her home.
Salty Pawz does have a Federal Employer Identification number for tax withholding purposes, a NC Sales Tax identification number and is registered with the NC Employment Security Commission for the purposes of reporting NC Unemployment Insurance Tax.
Two of Wanda’s friends help her on a part-time basis, primarily at night and on weekends after their regular jobs. She pays them in dog treats and is not currently paying salaries or wages.
Wanda’s brother-in-law manages her website, posting information about her products and keeping the information on the company current. He doesn’t charge her anything, but she feels badly asking him to do too much work for “free.”
Wanda spends most nights answering emails and inquiries through Etsy and her website while her friends bake and package the treats. She is working 15-hour days, 7 days a week and knows she can’t keep this pace up much longer. She is very reluctant to change how she is doing business because she doesn’t want to give up on the success she has built.
She is using the local “Pack & Ship” to get her dog treats to her customers, but sometimes she finds herself running to Pack & Ship more than once a day. She is trying to figure out a better way to handle shipping but hasn’t made any decisions about what would be best.
Wanda is concerned that if she grows the business, she may take on more financial and personal responsibility than she is comfortable with.
1. Prepare a chart showing Wanda the legal forms of ownership she could adopt for Salty Pawz as she expands the business. For each form of ownership, you need to provide the advantages and disadvantages of each legal ownership option specific to Wanda’s businesses.
2. After having explored the advantages and disadvantages of each form of ownership, which form of ownership would you recommend for Wanda and Salty Pawz, and why?
3. Lastly, if Wanda decides she wants the two friends she works with to become more formally involved in ownership of the business, does that change the advice you gave her in part (b) above and if so, how? If it does not affect your advice to her, then why not?
Explanation / Answer
Following are the types of legal forms of ownership that Wanda could adopt for Salty Pawz as she expands the business:
The advantages of this type of ownership are that the formation formalities are very easy as it is very rarely interfered by any form of legal formalities. It further helps in establishing better control over the all types of business activities. Further it has flexibility in Operations. There is also a possibility for the retention of business secrets and it is relatively easier to raise finance in this type of Organization. There is direct motivation granted to the proprietor of the business as the profits need not be shared with anyone. There is promptness in decision-making activities and direct accessibility to consumers thereby emphasis could be laid on the customer service. It has an inexpensive management with no legal restrictions and generates the opportunities of self-employment.
However, the disadvantages of this type of ownership are that it has limited resources to explore and generates the most of the investments from the family resources only in general. It also faces the limitations of managerial ability as one proprietor need not be an expert in all kinds of managerial functions. It has unlimited liability hence personal assets could also attached in meeting the business liabilities. There is further uncertainty in continuation of the business as there could be an even of proprietor’s immobility or death. There is a limited scope of hiring trained and qualified employees due to lack of career growth opportunities in the business. Also economies of large scale could not be achieved.
The advantages of this type of ownership is that it is easy to form and hence suitable for medium sized organizations where entrepreneurial efforts is essential. Further larger resources are made available to the business due to partnership of two or more partners in the business. More partners could also be included if the capital requirements increase over a period of time. There is availability of greater managerial talents that could enable the managers to assign duties as per the talents of the partners thereby ensuring more efficiency in the business. There is a better credit-standing when the partners have sufficient networking with various members of the society thereby increasing the credit-worthiness of the business in the market. It also enables promptness in decision making as there are possibilities of partners meeting each other frequently. The sharing of risk is yet another major element of partnership firm. Further there is good relationship between the reward and work in terms of awarding the partners with more profits as against the laborious efforts put in by them. There are also the opportunities of growth and expansion when there is a n active participation from all kinds of partners. There could be a close supervision over the activities of the business and flexibility of operations could also be established. The overall administration is also democratic and there could be a considerable savings upon the managerial expenses as well.
The disadvantages of this type of firm would be that it has unlimited liability and limited resources when it comes to putting additional resources for expansion. There could also be a possibility of instability in the business when the one or more of the partners quit for whatsoever reason or at the event of death of the partner. There could also be mutual distrust amounting to difficult working scenario and the burden of implied authority could also exist. There could also be lack of Public faith and prompt decisions taken the system. An overall cautious approach could also be adopted as the liabilities of the partners are unlimited thereby decreasing the risk taking appetite of the partners.
The advantages of this type of Company are that it can accumulate larger resources as the company can collect a considerable amount of funds from the Public. The liability of the members is limited. There is a bigger possibility of business continuity and efficient management as the ownership is separate from the management so it enables the Company to employ the experts who could manage the business more efficiently in exchange of high salaries. The economies of large scale production could be achieved. There is a provision for transferability of shares and hence potential shareholders may invest into the company and quit the same by transferring their shares to anyone else who is willing to pump in money into such a business. There is an ability to cope with changing business environments more efficiently than in any other forms of organization and the risks could also be diffused as the number of contributories is large. The set-up is also democratic in nature with all the shareholders having rights to participate in the decision making process of the company affairs.
However, the disadvantages are that there is difficulty in formation with loads of legal formalities in the picture. There is a separation of ownership and management so the shareholders role as such may perhaps be insignificant as they are separate from the management of the regular affairs of the company. Furhter, it could lead to the evils of factory system in an aggressive view to achieve economies of large scale production such as pollution, unhygienic conditions, exploitation of workers, etc. It gives rise to high speculation of shares in the stock exchanges. There are possibilities of a fraudulent management as the shareholders may not possibly preside over every activity of the business in spite them being the owners of the Company. There is lack or secrecy and delay in decision making as well due to various members involved in the picture. There is higher concentration of economic powers in fewer hands and excessive state regulations framed for running the activities of this form of ownership.
Hence, after having explored the advantages and disadvantages of each form of ownership, Partnership form of ownership would be recommended for Wanda and Salty Pawz because it would get them freedom to frame their own business norms and work culture the way they wish to and at the same time, they could earn enough profits among themselves by putting considerable amount of efforts into the Organization. The legal formalities would also be limited in this form of Organization. Two of these people together cannot go with the Sole proprietorship concern while settling up of a Joint-stock company would involve too much of formalities in the process. Hence partnership form is the most beneficial one
Lastly, if Wanda decides she wants the two friends she works with to become more formally involved in ownership of the business, even then this form of ownership would still suffice the purpose as they can include few more partners in the Organization.
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