What is the most suitable type of business structure that Mona should adopt and why?
Advantages and disadvantages of forming a company
One of the most important business structure that can be established is a company. A company is formed when registered resulting in a separate legal entity wherein the company is distinct from its members.
Once a company is formed then it has various advantages, that is,
- It has no limited life and has perpetual succession,
- The liability of the shareholders is limited to the value of their shares,
- Various tax advantages are provided;
- It is easy to raise finance;
- Confidentiality is maintained.
But, there are few disadvantages, that is:
- It is very expensive to form a company as it is very time consuming;
- various statutory provisions must be comply with, etc.
- the Annual General meeting provision must be comply with.
Thus, these are the few business structures from which Mona must select.
As per the facts, Mona has developed a phone called the “Safety First” watch. It is the combination of Global Positioning Satellite and phone technology and can be used to call the nearest emergency services.
Now, the “Safety First” watch is still in the early stages of research and development. It is anticipated that commercialization of the product will follow soon after. In such situation, it is advice to Mona that the best business structure that can be adopted by her is by forming a COMPANY because of the following reasons:
- It is advisable to form a company because it results in the establishment of a separate legal entity which is separate from its owner (Mona) and has perpetual succession. Thus, even if Mona dies or does not become part of the company, still, he “Safety First” will continue to trade without any hindrance;
- Mona requires funds to complete her initial testing of the device. It is very easy to raise money if the company is formed when compared with other business structures;
- If she operates the business by way of a company, then, the acts of Mona will be distinct from the company and thus her liability will be limited to the extent of her shares;
- Though the establishment of a company is an expensive affair when compared with a partnership and a sole trade ship but there are numerous tax advantages that can be gained by Mona.
- If a company is established then the confidentiality and secret information that are not to be disclosed can be kept private when compared with a partnership wherein there is a risk of release of the confidential information. Considering the functions that the “Safety First” can carry out, it is advisable that the information relating to the device must be kept confidential.
- In company, Mona will the sole decision makes and people can be employed for the working of the company. Thus, the chances of any disputes are almost negligible.
It is thus concluded that amongst all the business structures Mona must form a company which will gave a separate legal entity to the business which will never die and Mona can raise finance to sustain the production of her product.
In doing so, you will need to consider at least two other business structures and explain why these may not be appropriate for Mona.
There is no one way or manner to carry out business in Australia. The two other business structures that can be considered by Mona are partnership, sole trade ship. Every business structure has its own pros and cons. Thus, some of the business structures are analysed before giving advice to Mona.
Sole Tradeship - A business can be established like a sole trade wherein one individual person is the sole owner and controller of the business and is accountable for all its profits and losses individually. It is advantageous to form a sole trade ship because it is not expensive, takes less time and confidentiality is maintained. But, the business cease to exist if the owner dies, all the risks and the losses are borne by the owner; it is very difficult to raise finances.
Partnership - Further, Partnership can be establish wherein two or more person join together to carry on a business activity with common objective and with the aim to earn profits and share losses. Some of the advantages are that there is no requirement of any registration. A simple agreement is suffice. It is easy to make and not expensive, partners are liable jointly and severally, thus, the risk does not fall on one partner. But, a partnership is dissolved if any partner dies or ceases to exists, confidentiality is hampered, there are chances of conflicts, etc.
Why a sole tradership and partnership may not be appropriate for Mona
The Reasons why Mono cannot form a sole tradeship or partnership are:
- Mona cannot form a partnership as it requires minimum two persons for its establishment.
- If a sole trader ship is operated by Mona then she will accountable for all the risks and losses directly and thus her liability is unlimited.
- It is also not advisable to carry out as a sole trader because the extent of research and personnel required cannot be met. Mona requires experts and more personnel’s which cannot be acquired in a sole trade ship.
- Even if Mona intends to form a partnership by bringing any person as a partner, still, it is not advisable to operate the business by way of a partnership because the dissolution of the partnership is very easy, for example a partnership is dissolve when there is incoming of outgoing partners. Thus, this will hinder the working of the business.
- If a partnership is formed the there are chances of conflicts that may take place amid Mona and the perspective partners.
Thus, it is advisable that a sole trade ship and the partnership should not be formed.
In what form and how might Mona can raise $100,000?
Now, if a private company is formed (a company wherein the maximum number of employee shareholders is fifty) any if there is a need to raise finance then as per section 113 of the Corporation Act 2001, a private company cannot raise funds from the public. The two common method by which the funds can be raise are:
- Equity finance, that is, to raise funds for the existing employees and shareholders – The director of the company must make decisions to raise the capital by equity financing. At times the approval of the shareholders is required but that depends upon the provisions of the constitution of the company. The equity financing must always be carried out in good faith and in the best interest of the company.
- From general public provided there is no requirement of any disclosure document. When the securities are offered then it gives them right to vote in the general meetings of the company, to receive dividends, to received the annual financial statements of the company, if the company is wound up then the right to return of the paid up capital.
- Funds can be raised from few investors which includes:
- By seeking small scale personal offers. This can be attained by maximum 20 investors in periods of 12 months. But, the maximum amount that can be raised is $2 million in the given period;
- Funds can be raised from any person where there is no consideration is payable for the shares
- Funds can be raised from the listed companies;
- At times sophisticated investors can be entertained for the raising of funds. These include financial services licensees, professional investors or the entities investing up to $500,000.
Some of the other ways to raise funds are:
- Grant – The local/state/federal government gave grants to business if the business qualifies for the same. The grant depends upon the size and scope of the business. But, seeking grant is a time consuming and expensive process. It requires lots of paper work and search work.
- Investor – If there are people who are willing to invest in the company, then, funds can be raised through them.
Thus, these are some of the options which can be availed by Mona in order to raise finance for her business.
Now, Mona urgently requires another $100,000 to complete her initial testing of the device.
As per section 113 of the Corporation Act 2001, normally she is not allowed to raise finance from the public. But she has other options to select from. For instance, she can go for equity funding through her employees. She cannot raise funds through shareholders as she is the sole director and owner of the company. But, this is not the right option as this will result in making the employees as part of the business decision thereby loosing the confidentiality of the business. Likewise, if the funds are raised from public then also the confidentiality of the business is hampered as the public will have access in the decision making of the company.
She can raise fiends through investors by seeking small scale personal offers or by sophisticated investors. She can also seek the help of the government by as for grants but it is not the right option as requires much search time and paper work. But, since her project is for the public good thus the chances of getting rants are very high.
Also, the best way to raise finance is to either seek grant from the government or to look for investors who are willing to invest in the company. By doing so, the confidentiality of the business can be marinated and her need of finance can be met.
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