1.

Business size issues

When a sole proprietorship expands, it faces the problem of shortage of capital and
managerial skills. Two alternatives are available to the proprietor for solving this problem:

1. To employ a paid assistant; or

2. To admit one or more partners.

Employment of Paid Assistant: When the sole proprietor employs a paid assistant, he has the
following advantages and disadvantages:

Advantages:

(a) Division of work:

A specialist assistant can be appointed whose expertise can be used for the benefit of the
business. By delegating some of the work, the proprietor can devote greater time and attention to
crucial matters of business.

(b) No share in profits:

The assistant is paid a fixed wage or salary. Such wage or salary is an expense for calculating
taxable income. The assistant is not given a share in the profits.

(c) Complete control:

The paid assistant has no right to interfere in decision-making. Therefore, the proprietor retains
full control over the business. He can take decisions quickly.

Disadvantages:

(a) Lack of motivation:

The assistant does not have sufficient incentive to work hard unless he is given a share in the
profits. Therefore, he may not be as sincere and careful as the proprietor himself.

(b) Lack of responsibility:

The employee is not responsible for the losses incurred in business. The risk of failure has to be
borne by the proprietor himself. It is difficult to find a suitable person for employment. If a
wrong person is employed, it may create new problems.

(c) Problem of capital:

Appointing a paid assistant does not solve the problem of finance. The employee does not bring
any capital with him. Employment of an assistant does not add to the borrowing capacity of
business.

2. Issues related to mission and objectives

In expanding a business, you could outgrow your premises in the short-term. There may
not be enough space for everyone to work efficiently. In business planning, there are short term
and long term goals to be accomplished. There should be a steady and careful procedure in
taking all of these goals at once.

3. Procedures for incorporation

1st Step - File Articles of Incorporation with Your State Government Office

The next step is to file specific paperwork, often known as Articles of Organization, with
your state office. The document is straightforward and you’ll be required to provide information
like:

 the name and address of your LLC

 Your LLC’s purpose. You typically won’t need to be specific here, and can even give a
general answer like “The purpose of the Limited Liability Company is to engage in any
lawful activity for which a Limited Liability Company may be organized in this state.”
 The name and address of your registered agent (this is the person designated to receive
official papers for the LLC).
 An indication of your management: will your LLC be member-managed or manager-
managed?

2nd Step - Create an LLC Operating Agreement

 While the LLC is a great choice for those business owners looking for increased personal
protection with less formality, there still is some paperwork involved. Some states require LLCs
to create an operating agreement. This document is an official contract that spells out the
management and ownership of the LLC. It can outline details like how much of the company
each member owns, everyone’s voting rights; how profits and losses should be distributed among
the members; and what happens when someone wants to leave the business.

The operating agreement can just be a few pages, and you can find some samples on the
Web. Even if your state does not require an operating agreement, it can be an important
document to help clarify verbal agreements and prevent misunderstandings.

3rd Step - Apply for a New Bank Account

If you had a business bank account for your sole proprietorship, you’ll need to close that
account and open a new one in the LLC’s name (and with your new EIN number). Now that
you’re an LLC, you’ll need to maintain a sharp separation between your business and personal
finances. This will help shield your personal assets from the business – and has the added benefit
of streamlining your business’ records for tax reporting.

4th Step - Apply for Business Licenses and Permits

Don’t forget about any of the licenses and permits that are required to legally run your
business – such as a professional license, reseller’s permit, or health department permit. Some
states require that you reapply for a license when your business structure changes.

With those four basic steps, you have now formalized your business activities into a
formal business structure.

4. Personnel Issues

There are a lot of precautions in expanding your business. If it grows too quickly, it may
experience staffing problems. The following are the common problems regarding the size of a
business:

 Morale may drop if staff cannot cope with the extra work. Productivity can decrease.
 Taking on more and more work to generate more income places additional pressure on
your premises and staff.
  Management may be under pressure, operating reactively rather than proactively.

To prevent these problems, the manager of the Abakada Company may work with a
professional business adviser in helping to grow a business. Another is to learn more about risk
management. One should know their risk levels to be prepared for future problems.

5. Control Issues

Advantages of Corporation:

Shareholders in a corporation are not liable for corporate debts

This is the most important attribute of a corporation. In a sole proprietorship or a

partnership, the owners are personally responsible for business debts. If the assets of the sole
proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal
bank account, house, etc. to make up the difference. On the other hand, if a corporation runs out
of funds, its owners are usually not liable.

Transferring the ownership interests of a corporation is easier

Ownership interests in a corporation may be sold to third parties without disturbing the
continued operation of the business. A sole proprietorship or partnership, on the other hand,
cannot be sold whole. Instead, each of its assets, licenses and permits must be individually
transferred. Plus, new bank accounts and tax identification numbers are required.

Advantages of Sole Proprietorship:

Sole proprietorships and partnerships cost less to establish

Corporations cost more to set up and run than a sole proprietorship or partnership. For example,
there are the initial formation fees, filing fees and annual state fees. However, these costs are
partially offset by lower insurance costs.

Sole proprietorships and partnerships have minimal formalities

A corporation can only be created by filing legal documents with the state. In addition, a
corporation must adhere to formalities. These include holding director and shareholder meetings,
recording corporate minutes and having the board of directors approve major business
transactions. If these formalities are not maintained, the shareholders risk losing their personal
liability protection. While keeping corporate formalities is not difficult, it can be time-
consuming.

6. Funding sources issues

Sole Proprietorship

The financial resources of a sole proprietorship business are intimately tied to those of its
owner: when the business loses money, the losses come out of the owner's personal funds, and
when the business makes a profit, this amount is recorded as income on the owner's personal tax
return. Sole proprietorships tend to find investment funds by drawing on the owner's personal
resources, either through an infusion of personal savings, loans from friends and relatives, or
bank loans based on personal creditworthiness.

Corporation

Source 1: Shares

In a corporation, there are more sources of funds compared to a sole proprietorship. The
principal source of finance, shares are of two types — Equity and Pref. Shares. The equity shares
provided a cushion of safety against temporary unfavorable ‘development since they do not take
dividend when there is no profit. However, equity shares have some drawbacks.

There is interference from equity shareholders. Issue of excessive number of equity

shares may result in over-capitalization. Pref. shares do not impose heavy burdens on the
finances of the company. Pref. shareholders have no voting right. They cannot interfere in
company activities.

Source 2: Debentures

A significant source of finance without sacrificing control, the company can procure
capital. Trading on equity is possible. Period of redemption is known. So, the money can be
utilized in a planned way. But where a company’s earning is unstable, debenture issue may not
be desirable.
Source 3: Public Deposits

It is an important and traditional source of finance no security need be given. Only

interest payment, but various restrictions are now imposed by government. It is like fixed
deposits. They can be encased earlier.

The drawback is that financial plan cannot be prepared earlier because of uncertainty of
the amount of money to be secured. In-spite of some deficiencies, this source is becoming
popular for more return to investors.

Source 4: Banks

They also play an important role in finance companies on short-term, mid-term and long-
term basis. Generally midterm & short-term loans are available. But formalities to be complied
with may discourage companies to take loans from banks. Various information have to be
disclosed which the company may not like to do.

7. Legal and taxation issues

After you’ve incorporated your business, one thing you should consider immediately is
taxes. Almost 9% of all small and medium businesses last year faced legal problems concerning
taxes making this one of the most common legal issues.

The Abakada Company should register with the tax authorities and coordinate your
accounting procedures, to make sure you comply with all tax laws that are applicable to you.