Business Basics Assignment 1 Apex Training Company Martha is

Business Basics

Assignment 1. Apex Training Company

Martha is president of Apex Training Co. Before launching Apex, she was vice president of marketing for Globus Training, a company that earned $125 million in training revenues annually. She was instrumental in Globus growing at a 25% rate per year over a period of four years. She left Globus and set up her own training company because she believed that she could be as successful running her own business as she was in helping Globus to grow.

After six years of operation, Apex is generating $4.2 million in revenues, split evenly between public seminars and in-house programs at client sites. When reviewing her books, her accountant tells her she has done a great job establishing a business. But he expresses concern about the fact that she is running the business as a sole proprietorship. He suggests that while the sole proprietorship may have made sense during her earliest start-up stage, she had perhaps outgrown that legal structure.

In responding to the following questions, avoid talking in theoretical generalities. Make sure your comments would be useful to Martha if she had a chance to review them. Your advice should be pertinent to her specific business – remember, she is running a training company, not a retail or manufacturing business.

Why did it make sense to establish Apex as a sole proprietorship at the time it was launched?

What do you think were the accountants’ concerns about running Apex as a sole proprietorship?

What relative advantages and disadvantages would Martha face if she structured Apex as a partnership or LLC?

The accountant talked about outgrowing the sole proprietorship structure. Is it possible to employ a sole proprietorship structure for larger, mature businesses without them “outgrowing” the structure?

Your response should be no longer than three pages long, typed single spaced.

Solution

It made sense to establish Apex as a sole proprietorship at the time when it was launched due to the fact that ease of starting as well as operating a sole proprietorship is highest when compared to other forms like partnership or private company or any other forms. During the early stages the business owners and managers want to focus their energy on growing the business and would want to avoid any encumbrances that can occur due to government regulations. The level of autonomy is highest and this suits the needs and requirements of owners of business during its early stages.

The accountant’s concern about running Apex as a sole proprietorship was that the business has now outgrown this form of business and considering the current size and growth potential of Apex sole proprietorship is not the apt legal structure for the business. This is because as the business is growing it will lead to liability issues for Martha. Personal assets of the sole proprietor are now put to risk and the owner is personally liable for all business losses that might occur in future. Hence the need of the hour is to change the legal structure of the business.

Relative advantages that Martha will face if she structured Apex as a partnership or LLC – First of all Martha will not be personally liable any more. The partnership or the LLC will have a distinct legal entity that will be separate from the entity of Martha and hence Martha will not be responsible for business losses and debts. Secondly it will be easier for Apex to raise funds to finance future growth of the company if it is a partnership or a LLC. The avenues for raising capital are limited for a sole proprietorship.

Relative disadvantages that Martha will face if she structured Apex as a partnership or LLC – The cost of setting up will rise as forming a partnership or a LLC requires more legal approvals and more paper work. A partnership or a LLC will be subjected to more regulatory requirements and so the back end work load will also increase for Apex.

It is possible (but slightly so) to employ a sole proprietorship structure for larger and mature businesses without them outgrowing the structure. In other words for a larger and mature business employing a sole proprietorship structure will make it very difficult for the optimal management of the business due to the fact that such a structure has only one owner and hence it becomes highly difficult for the single owner to shoulder all responsibilities and expand the business beyond a point.