Business Organizations - Assignment Flashcards
What options does a partnership have to raise capital?
Partnerships options for raising capital are somewhat limited. Typically, they can seek out additional partners (perhaps limited partners) who are willing to contribute financially, or apply for bank loans, usually against their mortgages.
What options does a corporation have to raise capital?
Corporations have the most options for raising capital. The most common way would be through selling shares. Corporations can also raise capital through banks or private equity firms, giving them more flexibility when it comes to raising capital than a partnership or sole proprietorship
What would the process be for a sole proprietor to change its business structure to that of a partnership?
After identifying a partner that you share the same values with, a partnership agreement would have to be created. This agreement would typically include the following:
- Location
- Date of commencement
- Partner contribution and division of responsibilities
- Division of ownership
- Voting strength and majority
- Partner salaries
- Record keeping responsibilities.
- Dissolution plan
- Plan for incapacitated partner (successor for partner or purchase plan)
What would the process be for a sole proprietor or partnership to change its business structure to
that of a corporation?
Since sole proprietorships or partnerships center around the owners or partners involved, things like managing and business finances are very directly tied to these people and their every decision.
To change to a business model of a corporation then, would mean the giving up of legal ownership of the business so that it can run as an independent body distinct from those who own it. Since likely the one owner or the several partners that previously ran the company would still continue to run it, it would be important to define with care and attention their roles and ownership shares in the corporation when it is formed. Additionally, it would be important to clearly define the policies of the new business, such as how decisions are made and new shareholders incorporated in.
Take each of the following scenarios and describe a business organization that would fulfill its needs
(control of decision-making, raising finance, limiting liability, optimal tax position). Identify the advantages
and disadvantages of the type of organization that you selected.
You are: An inventor/entrepreneur who plans to make and sell 100,000 widgets in 12 months. You need
premises, raw material, machinery and operating cash until your first sale.
I would seek out a limited liability partnership with a larger investor, preferably someone with connections to the industry. Adding a limited partner would mean I still retained most of the control but ease the financial load. Additionally, the limited partner may be able to help with sourcing material, and machinery.
A limited partner is preferable to a sole proprietorship in this case because as a sole proprietor I would be looking at taking out a sizeable personal loan to finance the business, this would come with a deal of risk, as well as significant interest paid over the 12 months before cash flow began.
Adding a bigger partner would allow me to obtain financing through them in exchange for part of the company, this would reduce profits, but also reduce personal risk.
Take each of the following scenarios and describe a business organization that would fulfill its needs
(control of decision-making, raising finance, limiting liability, optimal tax position). Identify the advantages
and disadvantages of the type of organization that you selected.
You are: One of a group of engineers with a variety of disciplines (geotechnical engineer, civil engineer,
structural engineer, mechanical systems engineer) who have decided to join together to offer “full
service” to the construction industry. (Describe the agreement between the engineers and assume
there has been an unequal contribution of resources.)
It is recommended to choose a limited liability partnership (LLP) for an engineering business since it is a high-risk profession. The LLP provides more liability protection to the partners as they are not responsible for each other’s risks.
Moreover, partners can decide each other’s contributions, responsibilities, and profit-sharing. However, the partnership has a disadvantage that partners cannot transfer ownership. The partnership agreement should cover essential areas such as decision-making processes for important issues, partner compensation, capital contribution, overhead and liabilities, parental leaves, and sabbaticals, and retirement and termination.
Since there is an unequal distribution of resources, the partnership agreement should reflect who has contributed more resources.
Take each of the following scenarios and describe a business organization that would fulfill its needs
(control of decision-making, raising finance, limiting liability, optimal tax position). Identify the advantages
and disadvantages of the type of organization that you selected.
You are: A sole proprietor of a window fabrication and installation business. You have been developing the
business for 20 years ($20m per year) and now would like to reduce your time at work and phase in
retirement. At the same time you would like to take some value out of the company. You have no
children interested in running the business. Your management team of 3 are capable and could run
the business for you. Describe the steps required to arrange a management buy-out.
The first step would be to value to the business prior to the sale. After a price has been arranged, the management team would have to form a partnership between themselves, and secure financing for the purchase. Financing for the management team would likely come from banks or private equity firms, as well as their personal contributions.
With the partnership agreement arranged, and a company formed the business would then be sold to the new company. The CRA would need to be alerted, and a business name change may be required is the sole proprietorship was legally registered with my name.
After the sale, the new management partnership would have full control of the window company, while I would receive the payment and have to deal with the tax implications created.
Take each of the following scenarios and describe a business organization that would fulfill its needs
(control of decision-making, raising finance, limiting liability, optimal tax position). Identify the advantages
and disadvantages of the type of organization that you selected.
You are: An established corporation involved in the communications business. You sense a need for another
player in the utility pole business and an opportunity for share purchase/capital gain for your
company, yourself and your investors.
An established corporation in the communications industry can expand into the utility pole business by creating a subsidiary corporation. This type of organizational structure allows the parent company to keep control over the subsidiary’s decision-making while also protecting its assets in case of legal issues. The parent company can use its resources to raise finance for the subsidiary, which can also issue its own stock or debt securities for funding.
Consolidated tax filings can optimize tax position by allowing losses from one part of the business to offset profits from another. However, setting up and managing a separate entity can be complex. It requires maintaining distinct corporate formalities and managing intercompany transactions to avoid tax complications. Also, financial difficulties faced by the subsidiary may harm the parent company’s reputation and value, even if liability is limited.
