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Medium of Finance Chosen by Don Jones

The medium of finance selected by Don Jones, sole proprietorship is the simplest form of enterprise.  Indeed entrepreneurs normally commence a business activity through such form due to its simplicity.  It is simple to incorporate and to manage since everything is in the hands of the one owner present.  This can be regarded as an important benefit since the owner will hold liberty and flexibility in managing the business enterprise in line with his pace.

However, we cannot easily contend that a sole proprietorship is the best form of enterprise available.  Even though it is the most common type both in the United States and Europe, it too holds certain limitations.  For instance due to one owner, there knowledge of management will be limited only to such person.  In order to attain proficient opinions, he is requested to employ consultants, which are considerably expensive.

Sole proprietorship is also desirable due to its limit administrative costs incurred in its incorporation. In addition, the financial reporting requirements necessary for such mode of enterprise are relatively simple ranging from a tax return to a simple set of final accounts.  The government also offers a tax advantage to sole proprietorship.  They hold the capability of offsetting

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losses incurred in the business with other income generated from other activities in the tax return.

The main limitation of a sole proprietorship, which frequently induces entrepreneurs to shift to another medium of finance, is the lack of capital present in such form.  Since there is only one owner, the monetary value of capital invested in the company will be limited to only one person.  In addition, banks and other external providers of finance will be reluctant to provide finance to organizations that hold a limited asset base partly stemming from such limited capital.

This will hinder the firm in growth strategies it may foresee.  As outlined in the law, it is also important to note that the owner of a sole proprietorship holds an unlimited liability towards all the debts present in the firm.  His private property is therefore at risk to be taken as a part payment of the liability in case of bankruptcy.  In light of the disadvantages noted above, it is important that Don Jones considers the alternative forms of enterprise before deciding on the optimal form.

  • Alternative forms of business enterprise

The two main alternative forms of business enterprise available are a partnership and a limited company.  In this section we shall consider these forms together with their inherent advantages and limitations.

1.1.1 Partnership

A partnership is very similar to a sole proprietorship with the exception that the owners of the business enterprise are more than one, usually not exceeding twenty.  The formation of the firm is a little more complex, encompassing the preparation of a partnership deed.  This document entails matters concerning the partners, such as capital invested by each partner, share of profit and losses, interest on capital and drawings if applicable and partners’ salaries.

As one can immediately notice, such form of business enterprise would limit the disadvantages of lack of capital and lack of expertise present in a sole proprietorship form.  The partners, who could hold knowledge in different areas, would be able to utilize their knowledge in the best interest of the organization.  The additional capital available could also enhance the achievement of any growth strategies set.  The accounting requirements of a partnership are also very similar to those of a sole proprietorship.

There is nothing perfect in the world and partnership also holds its limitations.  Disagreement between the partners can be detrimental to the running of the business leading to a stalemate.  It is also worth nothing that a partnership also holds unlimited liability like a sole trade, leading the private possessions of partners at risk.

1.1.2 Limited Company

A company significantly differs from a sole trader and a partnership.  The number of owners of a company, commonly known as shareholders, can be more than twenty.  This is based in accordance with the number of shares and shareholders applying for such shares.  Public companies normally hold hundreds and even thousands of investors.  In the eyes of the law a limited company holds a separate legal entity to its owners.  In this respect, the incorporation of a company holds a considerable high administrative expenses incurred in the preparation of relevant documents, such as memorandum and articles of association.

The separate legal entity noted above, holds however an important advantage, which encompasses a limited liability.  This factor however leads to tighter accounting requirements in order to protect the other external stakeholders.  Indeed a limited company is required to annual prepare a set of detailed financial statements portraying the financial health of the firm.  An independent auditor should also audit such financial statements, prepared by an accountant.  This directs to more administration costs.

  • Final Thought – Which form of enterprise should Don Jones choose?

The answer to the question post in the title of this latter section stems from the situation in which Don Jones is present.  It is therefore pertinent that the selection of a business enterprise form is based by putting in light the advantages and disadvantages of each form to the present situation and envisaged plans of the present business enterprise.

References:

Randall H. (1999). Accounting. Third Edition. London: Letts Educational.

Reference for business (2007). Sole Proprietorship (on line). Available from: http://www.referenceforbusiness.com/small/Sm-Z/Sole-Proprietorship.html (Accessed 7th March 2008).

Weetman P. (2003). Financial and Management Accounting. Third Edition. Essex: Pearson Education Limited.

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