Project #39669 - lesson 4

 

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    The form of business organization is of great importance to the owner of a business. Whether a business is organized as a sole proprietorship, a partnership, or a corporation, the form will have an impact on taxes, the distribution of profits, the ownership and control of the business, as well as the liabilities of the business owners. Making the right decision about how to organize is crucial to the long-term profitability of most organizations. Here are three situations in which people organizing businesses had to decide on an appropriate form of business organization. In each of the cases, consider how you might organize the business.

    Example 1:  Josh and Sally Ackerman decided to join with their close friend Lisa Johnson to form a new business to market pet products. The friends purchased the exclusive license to market a patented insecticide-dispensing comb that kills fleas and ticks on dogs and cats. The comb contains a special insecticide that saturates the comb’s sturdy teeth and coats the animal’s skin and fur, killing fleas and ticks on contact. The product has been proven successful in a test at a major university and in private tests conducted by veterinarians. The insecticide used in the comb has been judged as very safe because it is derived from natural sources. The partners decided to name the product the d’flea liquid-dispensing comb and to market it throughout North America. Because this is a new product and potential buyers would have to be educated about the product, the partners felt that veterinarians and pet stores might be the best channels for obtaining access to the market. 

    Because the new friends were marketing only one product, they did not have to finance production facilities or other expenses associated with physically making the product. They had to establish promotion and communications to try to encourage veterinarians and pet stores to carry the product.

    Example 2:  Elizabeth Jones recently quit working for a major publishing company and has decided to become a freelance editor and writer for a number of publishing companies who might need her services. Elizabeth plans to purchase a new computer, word-processing software, and other equipment that she will need to write and edit manuscripts. She plans to work in her home office so she can be closer to her family and use extra time during the day to work on manuscripts.

    Elizabeth is trying to decide whether she should incorporate or operate as a sole proprietor. As a legal entity, a corporation has many of the rights, duties, and powers of a person, and the incorporators have limited liability for the business. Elizabeth is especially interested in keeping her business assets and liabilities separate from those of her family. Thus, any liability or risk associated with her business would be isolated from her family’s finances.

    Example 3:  Andrea Lindell and Jill Curry have decided to fulfill a life-long dream of opening their own retail store. They live in a town with a population of less than 50,000, and they are interested in opening a gourmet coffee and tea store. Andrea and Jill plan to call their business The Gourmet Coffee Store.

    The Gourmet Coffee Store will serve fresh-roasted gourmet coffee and tea to generate traffic. They are also considering serving pastries and desserts to encourage people to come to the store and look at the gourmet coffee products that they plan to sell. Some of the gourmet coffees the store will offer include Hawaiian Kona, Kenya AA, Sumatra Mandheling, and Jamaican Blue Mountain. Andrea and Jill plan to buy roasted coffee beans from wholesalers and make them available in the store through displays. They will grind coffee beans for use in coffee makers for customers who want ground coffee.

    The women believe that their initial investment will be around $25,000. They have leased a small store area in a neighborhood shopping center for only $1,000 per month.

    They are trying to decide whether to organize as a partnership or as a corporation. One reason for considering a partnership is that a partnership requires little more than drawing up articles of partnership. No legal charters have to be granted, although the name of the business should be registered with the state. They have pooled their financial resources and have a better credit rating than they might have if they were operating independently. A partnership would allow them to use their diverse skills in running the store and to share decision making to achieve the most effective management of the store.

    On the other hand, they have read some information about corporations and are interested in some of the advantages of incorporation, such as limited liability and possible tax advantages. However, incorporating sounds complex, and Andrea and Jill are unsure of what to do.

    Discussion Question:  Consider the options of organizing as a sole proprietorship, partnership, or corporation for each of these examples.  Indicate how each should organiize and explain your recommendation.

 

Subject Business
Due By (Pacific Time) 09/12/2014 12:00 am
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