Business Ownership Choices - 10 Mark Question

Amita and Yi are aware of the risks involved in expanding the business. Even though they have already invested their own money in the business, there may be a need for additional finance as well as more employees.

Actual Question:

Amita and Yi have recently had a meeting with a local business advisor about their plan for the expansion of Orion Designs.

They were given three possible options:

* Option 1- stay as they are;

* Option 2- take on additional partners

* Option 3 – turn the business into a private limited company.

Recommend the best option for Amita and Yi, explaining why the other options were not chosen.

Introduction:

Amita and Yi are two friends who have a business that puts designs onto pottery. They are currently a partnership but are trying to work out whether they should change the ownership type of their business in order to expand.

Paragraph 1 (Analysis of Option 1 and Option 2)

The business is currently a partnership so Amita and Yi both have unlimited liability. This means they would have to sell their personal assets if the business went into debt. If they took option 1 this disadvantage would still remain. Option 1 is low risk as they are not doing anything different but it might be difficult for them to expand as they won’t have any additional finance. If they know people who want to join their business then they could take on additional partners, these would have unlimited liability as well. This would bring money into the business but these new partners might want a say in running the business and it might not be what Amita and Yi want, this could lead to arguments.

Paragraph 2 (Analysis of Option 3)

As a private limited company, the owners of Orion Designs have the benefits of limited liability so they can only lose the amount of money that they invested in the company. So the owners of the business would have more security. If Orion Designs want to expand and have new ranges then they will need more money, if they become ltd they could raise the money they need by having shareholders. This would be an advantage to Orion Designs. At the moment all profits go to Amita and Yi, if they were to become a private limited company they would receive less profits themselves as they would have to pay dividends to all shareholders.

Conclusion

At the moment there are only two partners, Amita and Yi so they will be limited in the amount of money they can invest but they can make all the decisions themselves. If it were to become a ltd then other shareholders would be able to make decisions and Amita and Yi would lose some control of their business. There are also legal formalities involves in becoming a ltd which would take time and cost money.

In order to secure the future of the business and expand I recommend that Orion Designs takes option 2 and stays as a partnership but invites other partners to invest in the business. This way they get the advantage of more capital in the business but do not have to spend a lot of time and money becoming an ltd.