I considered having a sole proprietorship
Question I
I considered having a sole proprietorship or a
partnership but eventually settled on the latter. One of the main reasons for considering
a sole proprietorship is because the idea to open a restaurant is mine. As I
have conceived the idea, and will be in charge of the daily running of the
business, a sole proprietorship seems proper. Pat seems to have his hands full
running his various business ventures, and it does not seem to matter whether
or not he plays any role in the business. Had he been willing to commit to
working for the restaurant, I would have employed him in a managerial capacity.
As the sole owner of the business I could engage Ron as an employee, especially
because of her skills as a chef. Besides, she is willing to leave her current
employment and commit fully to the restaurant. Aside from her possibly working
as a chef, she could engage in other managerial duties where the food and
kitchen are concerned.
The benefits of a sole proprietorship in this case would
include limited expenditure on organizational fees, and the fact that taxation
for business earnings would be on the basis of personal income. Sole proprietorships
do not often have a complex organizational structure and as such, money is
saved on resources that would otherwise be used on the same (Twomey et al., 2017). Lack of resources is the
most disadvantageous factor about this form of business. I need financial
assistance in form of capital investment, for the idea to be practical. I do
not have the necessary financial muscle and Ron has limited funds, so the
logical solution will be to engage Pat. As a result of having several ventures,
Pat can easily finance the business. This, together with his willingness to be
involved in the business made me consider a business partnership. Also, since I
have limited financial capital and I am subject to unlimited personal liability
for the business, its collapse may leave me financially crippled. This is yet
another disadvantage of a sole proprietorship.
I considered and eventually settled for a business
partnership for other reasons other than the financial aspect. Sure, Pat could
chip in financially, but Ron’s talent in the kitchen are handy too. Having
several ventures made Pat the perfect candidate for management as his expertise
in business are required. Besides, they are both willing to commit to the
business in various capacities. The advantage of a partnership is that each of
us contributes something different to the business, more like an informal
pooling of resources (Twomey et al., 2017).
The main disadvantage is the dissimilarity of the resources being pooled, which
presents the issue of liability. Technically, Pat will contribute more to the
business in form of financial capital. I considered a Limited Liability
Partnership (LLP) where our liabilities as partners would only extend so far as
our contributions to the same (Twomey et al.,
2017). However, Pat will most
likely be the most affected in case of a business failure and to shield him, I
disregarded the idea of an LLP. Instead, I considered a Limited Liability
Company (LLC). As a formal legal entity, Pat’s investment into the business
will be protected, as will Ron’s and I.
Question II
There are two main forms of financing and lending that a
start-up business like ours could consider. These are debt and equity finance.
Debt financing involves securing business funds from external debtors such as
various financial institutions (like banks and credit unions), relatives and
friends, credit from retailers and suppliers, and finance companies among
others. The loans acquired in this case may be short, medium or long-term.
Short-term loans usually do not exceed a few months and are secured to cover
temporary business needs. Such needs include buffering stock or paying
personnel. Short-term loans are ideal for established businesses that have an
identified source of repayment. Therefore, they are harder for new businesses to acquire. Medium to long term
loans are repayable from 1 to even 20 years depending on the amount taken and
how the monies are utilized. Such loans are ideal for start- up businesses with
many expenses such as purchasing equipment, acquiring stock, rent and operating
capital among other uses.
The advantages of debt financing include the retention
of business ownership (Cremades, 2018).
The financier or lender does not gain any control of the business. Their gain
is from interest earned on the credit they extend. The disadvantages of this
type of financing include that there is a time limit on when the loan should be
repaid (Cremades, 2018). In most cases
the repayment of said loans starts as soon as approval for the loan is granted.
Loans are often secured using collateral that may include fundamental business
assets or that of the owners. In this case collateral may be seized in case of
failure to repay the loan. The amount of money spent servicing a business loan
may impact negatively on a business, more so if its profitability is low. The
money spent on loan repayment could also be used to improve a business.
Equity financing on the other hand involves investments
from business owners or other stakeholders who then benefit from being granted
partial ownership. This form of financing and lending constitutes a wide
variety of sources including from strategic partners, relatives and friends,
venture capital, private investors, personal finances, crowd-sourced equity
funding, and crowd funding (Cremades, 2018).
Advantages of equity financing include less risk as its repayment arrangements
are not as immediate as those in debt financing. Business profits may not be
used to repay such loans and as such, there is more cash to spare. There are
also cases where investors in equity financing provide additional benefits to
the business, such as new skills. One disadvantage of equity financing is the
surrender of partial ownership or control rights of a business to the lender (Cremades, 2018). This implies that they will
have a say in business affairs. Another challenge of equity financing is that
is not always easy to find the right business investor. Since I had already
decided on a partnership form of business, equity financing was not an option.
Instead we opted for a long-term loan of five years.
Question 3
Since the business is a restaurant sourcing of
items such as food, groceries, drinks, cutlery will be necessary. While items
such as cutlery will not require a constant purchase, food, drinks, and
groceries will need to be purchased consistently. It, therefore, means that
finding a reliable supplier is vital to the running of the business (“Manage your suppliers”, n.d.). Identifying a preferred supplier and
preferred supply terms will equally lead to a stable running of the
business.
Different supply options exist. These include
cash buying form identified suppliers. It could also include credit supply,
whereby payment is made after a designated timeline. The timeline could be
thirty days, for example. Payment could also be made through cash, check bank
draft, standing order, and money transfer. Credit supply is the preferred
option as it will allow the restaurant to recoup its finances for the month.
Paying after the thirty days also makes it easier to make payment arrangements
monthly. Cash supply is not the preferred supply method since supply can only
be made at the availability of cash. As such, it is not a recommended supply
method for the restaurant since the business is still new.
Written contracts are necessary since they act
as a legally binding agreement between the restaurant and the supplier.
Contracts would thus have to be entered with the different suppliers based on
the agreed-upon terms. Timelines are essential in a contract; hence both
parties must perform within the stipulated discharge timelines (Twomey, Jennings & Greene 2017, p 331). Some items will have to be supplied more
frequently than others hence the contract term differences. The settling on
credit supply terms, as well as having contractual agreements with the
suppliers, is practical in the real world. Businesses function under contract
terms for the security of the parties involved. A breach of contract could lead
to litigation. In case the supplier fails to supply items on time, the contract
details the reprieve measures are taken. The supplier, for example, could have
the contract terminated by us. In the case of defective goods, the supplier
could supply other products free of charge according to the contract terms. As
far as the restaurant is concerned, the timely order of goods is expected. The
supplier would not be liable for late order challenges such as out of stock
goods. The supplier could also terminate the contract based on the nonpayment
of products.
A contract thus ensures a mutual relationship
between the suppliers and the restaurant. As the restaurant grows, the business
needs will change as well. A change in requirements automatically dictates a
change in contract terms to include the new demands. The contract can thus be
revised to include any changes. It is, therefore, essential to indicate that
the contract is subject to change if and when necessary. However, both parties
would have to agree as far as the changes are concerned. The contract could
also be terminated by the parties involved (Twomey, Jennings & Greene 2017, p 335)
Question 4
Operating a restaurant involves risks such as
work-related injuries. Since the operation of the restaurant consists of a
partnership, there is the likelihood that one o the partners may opt-out in the
future. Food poisoning is also a risk that comes with a restaurant operation.
Contracts breach is also likely. It is important to note that contracts include
suppliers, financiers, and employee contracts. A supplier could, for example,
breach contract terms or go out of business. Such a scenario would not only
result in hiring a new supplier but could affect the running of the business
within the transition period. Employees could also breach contract terms and
lead to litigation or termination. Both situations would warrant the hiring of
new employees. Running a restaurant requires the recruitment of an array of
employees, such as cleaners, cooks, servers, and dishwashers. Having reliable
employees in these brackets could be a challenge as employee turnover is high.
Accidents at the restaurant are common; hence
tort cases are likely to occur. A tort case involves injury at the workplace (Cornell Law School, n.d.). Injury
could be a result of employer negligence, such as the lack of safety
installation. It could be as a result of employee negligence. In case of an
injury due to employer negligence, the restaurant would be held in tort
litigation, which would cost the business financially. It is in this regard
that understanding the potential risk is essential to avoid unnecessary
litigation. Identifying potential risks is necessary, but is not enough.
Installing measures to counter the identified risks is crucial. These measures
include installing safety measures such as safety devices. Outlining safety
policies at the workplace and making it accessible to every employee is equally
important. Complying with the necessary regulations, such as insurance cover,
public health, food regulations, and labor regulations, for example, is
essential.
The insurance cover would cover damage resulting from fire, for example.
Food and public health regulations, such as employee medical tests would ensure
that the likelihood of food poisoning is reduced. Labor regulations such as
overtime, benefits, and pay would ensure that employees do not sue the
restaurant on the grounds of labor law abuse. Contract signing between the
restaurant and suppliers, full-time employees, and lenders, for example, would
shield the restaurant from the service agreement breach. Supplier contracts,
for example, would ensure that the suppliers fulfill their product delivery
agreement within the stipulated terms. As such, the restaurant would be assured
of a reliable supply of goods hence the smooth running of the restaurant. The
uptake of a long term loan, for example, shields the business financially as
the repayment period is longer. The lending contract protects both the lender
and the restaurant. Understanding UCC laws is thus paramount to the business. These
solutions are practical since they are applied in enterprises and contribute to
business stability due to the lowered risk level.