CHOOSING A FORM OF OWNERSHIP John and Marcia Howard have jus

CHOOSING A FORM OF OWNERSHIP

John and Marcia Howard have just come into a small legacy of $50,000. This money has prompted them to go forward with a lifetime dream of owning their own business, deciding to open a retail apparel shop. They are, however, confused as to which form of business organization would be most appropriate for them. Knowing of your study of this topic at South Puget Sound Community College, they turn to you for advice.

Here is the Howards\' situation. They have been married for 11 years and have two school age children. Marcia has been working as a sales clerk at a local clothing shop and has developed a considerable understanding of the business. John is currently a delivery man for a major courier service earning $11.00 per hour. However, he has also taken accounting classes at the college and feels he could easily handle the financial aspects of the proposed business. John and Marcia have savings of $10,000 and $20,000 equity in their home.

The Howards\' plan is that Marcia would run the business and that John would pitch in the evenings and weekends. Later, as the business grew, both might be able to devote full time to this enterprise, and, ultimately, the Howards hope that their children might enter the business and take it over. Meanwhile, the Howards are looking for $20,000 per year in profit from the endeavor.

Both John and Marcia are hard workers and have a good reputation in the community. Marcia, however, tends to be very independent and has definite ideas about the right and wrong ways to do things. In fact, this has led to a few minor altercations with her current boss.

The Howards\' credit is excellent, having borrowed money before to finance their home and their automobiles.

The Howards have made an estimate of what they will need in the way of start-up funds. With inventory, fixtures and rent on a suitable shop as the main expenditures, they estimate that a total of $100,000 would be required.

Marcia knows a former high school classmate who would be willing to join the Howards in a partnership. This woman has $20,000 ready to invest, although she knows little about the apparel business.

The Howards have also considered the possibility of forming a corporation. Their lawyer suggested that they could incorporate and either retain all of the stock for themselves or sell some of the shares to Marcia\'s friend or others in the community who might want to take a chance on the new business.

Please analyze the Howards\' situation and recommend the best form of business organization for them. Indicate in detail the reasons for your choice.

The answer needs to be detailed and specifics.

Business 101-Intro to Bus

Solution

The best form of organisation for the Howards would be a partnership firm. They can mutually decide the share ratio and form a partneship firm. Such firms are most suitable for this kind of business, wherein members of a family start a business together. Further they can diversify themselves into a general partnership. Through a general partnership, both the partners will be liable for the debts of the business, the responsibility of the business will be of both the partners and they both can participate in making decisions for the business growth.

This type of firm is suitable for the Howards because of the following merits of a general partnership firm:

- simple structure and formation- to form this type of firm much formalities and paper work is not required. They can run with less rules and regulations than a corporation. They are not supervised by government for their operations and can work independently. As partnership firms are made by mutual understanding and relation or terms between the partners hence the working is simplified and clear. Each partner has predefined roles and contribution to the growth of firm. They can collectively take decisions and operate in the business activities regardless of their ratio of share in the firm.

- Easy taxation- The taxation formalities are followed like that of sole proprietorship. Both the partners will include their incomes from the business in the ITR and in the same way can cover the business loss from the tax return as well. The profits, losses and taxes are divided in the partners as per the ratio pre-decided in the partnership agreement.

- Dissolution conditions- As is the formation of the partnership firm is simple so is the dissolution of such firms. They can be dissolved at any time by a mutual agreement of all the partners. It can be due to the death of any one partner or any other reason which all the partners find genuine for disolving the firm.