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Forms of Business Organization
The organizational form of business is important in many ways:
It outlines the opportunities to generate additional resources;
Determines the span of control;
Ensures partners’ (including possible investors, suppliers and different governmental agencies) trust;
Determines the liability of the owners.
The Case of Far Horizon is quite difficult. On one hand, the manager has outgoing plans for expansion of its business. The creation of convenience center demands serious investment. Calculating the revenue from Restaurant and Lounge and subtracting all the expenses (including taxes and legal fees), I’ve come up to the net income of approximately $20000. The necessary investment into convention center is $338000, which is 17 times more than Far Horizon is able to provide on its own.
Thus, the necessity in additional financial resources is very vital. Taking this consideration into account, to incorporate business will be quite appropriate as a good source to generate money.
However, it is also important to notice that Far Horizon has no debt and has been a profitable organization for years.
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Moreover, his owner has a good managerial experience and he was the one running the organizational successfully. Thus, creating a Corporation will mean giving a part of managerial responsibilities to others, which can be quite disappointing, considering that the owner of Far Horizon has its own proven management model.
Therefore, considering owner’s managerial experience, effort and devotion to own business on one hand, and the vital necessity for additional financial resources, I would recommend to remain Restaurant and Lounge a sole proprietorship, but make future Convenience center a Private Corporation.
Such an organizational form will:
Help to generate necessary sum of money;
Remain in control, since public offering will not be provided. This makes the situation more predictable;
Private Corporation can be transferred any time into Public one.
Moreover, private incorporation will ensure that the owner doesn’t endanger current prosperity and success of Restaurant and Lounge, since no additional money will be withdrawn from those two business units. Furthermore, it can also protect owner from excessive tax expenses. However, the very main advantage of incorporation is limited liability. It means that restaurant and lounge will not suffer if Convenient Center gets losses. Thus, incorporating Convenience Center will also mean:
· avoiding financial and managerial risks,
· getting additional experience from partners;
· possibility for expansion.
Generally, each of four main business organization forms has the following advantages and disadvantages.
1.Sole proprietorship is an independent business, when everything is concentrated in one hand.
Advantages include:
easy formal procedures;
wide span of control;
the absence of necessity for huge start-up investment capital;
relatively low taxes.
The main advantage for Far Horizon is that the owner will solely control its business as he’s done before.
Main disadvantages:
unlimited liability (danger for Far Horizon’s owner to lose everything in case of failure – not just Convenience Center, but Restaurant and Lounge as well);
limited opportunities to raise money (this is especially important for Far Horizon considering substantial necessity for investment).
2. Partnership assumes shared responsibility over business. It means that both losses and profits are shared among partners. For Far Horizon partnership could be beneficial if the partner could be able to provide the necessary sum of money for Convenience Center (which is quite substantial sum of money). However, in case of both partners get broken, there will be no other opportunity to raise money. Moreover, both partners are liable to the organization with all their assets, which again endangers the existence of Wind Watcher Restaurant and Idle Hour Bar. Thus, the longevity of such an organization is doubtful. The advantages and disadvantages of partnerships could be summarized as the following:
Advantages:
· easy registration;
· still quite large span of control;
· control over profit;
· additional opportunity (compared to sole proprietorship) to generate money.
Disadvantages:
unlimited liability;
possible conflicts between partners;
doubtful longevity.
3. Corporation assumes incorporating business, which means the existence of shareholders (at least one). The main advantages of the corporations are limited liability and virtually endless opportunities to raise money, which is especially important for Far Horizon. Here, it is also important to notice the difference between Private and Public Corporation. The former is closed, i.e. its shares is not trading on the exchange and thus it is possible for the shareholders to control the situation unlike in case of the latter one. However, Public Corporation presents more opportunities to raise financial resources. Furthermore, as a rule, public corporations are more trusted by the potential investors and partners, since they are more disclosed due to the rules existing on every exchange market. A separate form of corporation is so-called S-Corporation. S-Corp may have just one shareholder and the total number of shareholders are limited to 100. Finally, the longevity of the corporations are substantial. Despite the attractiveness of such an organizational form as corporations, its main disadvantage is that they are quite expensive to establish and they are closely monitored and regulated in many cases by the Government. Moreover, shareholders’ dividends are taxed as well, which means double taxation for the organization. However, even despite those disadvantages, in the case of far Horizon, Private Corp appears to be the most suitable organizational form to both protect owner and raise money to ensure the development of Far Horizon project.
4. Limited Liability Company is privately held firm, which is liable only with the assets of the company but not the personal assets of the owner. The main advantage of this organizational firm is, certainly, limited liability and possibility of control. However, in order to create such a company the initial capital should be provided. Moreover, unlike corporations, Limited Liability Companies have limited alternatives to raise money. That is the main reason, why this organizational form is not suitable for Far Horizon. Moreover, exactly due to the limited liability, such companies are less trusted by potential investors and other partners than corporations. Thus, there are less chances to get attractive contracts and sign beneficial deals with investors and suppliers having this business organization firm.
In such a way, considering all possible organizational forms, the best suitable one for Far Horizon is to remain sole proprietorship for restaurant and Lounge and incorporate Convention Center creating a Private Corporation.
References
1. Forms of Business Organization. Oct.1, 2006 http://www.calgary-smallbusiness.com/bizorg.html
2. Harrison Jeffrey S. and John Caron St. Strategic management of organizations and stakeholders: concepts and cases, 2nd ed., Cincinatti, Ohio, South-Western College Publishing, 1994
3. Moorhead G. and Griffin Ricky W. Organizational Behavior, 4th ed., Boston, MA, Houghton Muffin Company, 1995
4. Riley, K. “Investment Analysis and Portfolio Management”. New York: The Dryden Press, 1991.
5. March, James G., and Simon, Herbert A., Organizations. New York, McGraw Hill, 1958
6. Simons, Robert “Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal.” Boston, Harvard Business School Press, 1995
7. Steers, Richard M. “ Managing Effective Organizations”. Boston, Massachusetts: Kent Publishing Company, 1995
The Organizational Form of Busines. (2020, Jun 02). Retrieved from https://studymoose.com/the-organizational-form-of-busines-essay
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