Ask Question
2 February, 00:49

Josh and Joe are opening a couture clothing boutique. There are no competing couture clothing boutiques in the area. They must decide how to organize the business. They anticipate profits of $ 550 comma 000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Answers (1)
  1. 2 February, 01:39
    Answer: They should start the business as a partnership


    Partnership is a form of business organization in which two or more persons agree to operate a business as co-owners with a view of making profit. It is suitable for any kind of business such as the one Josh and Joe are opening in the question. The number of persons who can form a partnership may not be less than two and may not exceed twenty, when they are about to start the business they put in writing all rules governing the partnership. These rules are called Article of partnership or Deed of partnership, The rules deal with:

    (a) The amount which each partner will have to contribute to the business

    (b) How the profit and the losses will be shared

    (c) How the business may be brought to an end if need be.

    (d) How new members should be admitted.

    However, since they are anticipating that cash flow will be an issue as they grow, I will not advice that they should start the business as a corporate form of business because corporate form of business requires greater time and money to be set up than other forms of business in the sense that legal fees, registration fees, government officials bureaucratic delays are some of the issues to be considered when setting up this form of business. Therefore, they can utilize the following to solve the issue

    Plough back profit : The profit made in the business can be retained in the business for the purpose of expansion of the partnership business for example the anticipated profit of $550,000 in the first year can be retained in the business for expansion.

    Members personal contribution : The partners can jointly agree to provide additional capital for the expansion of the business.

    Trade credit : The business can make use of deposit made by the buyers who wants to buy their cloth to facilitate more production of the cloth.

    Loans and overdraft : The business can approach a commercial banks to take loans or overdraft to finance the business since all partners are jointly liable for the debt of the business.

    Admission of new partner : The business can admit new partner into the business, when this is done more capital will be brought into the business which the business can then utilize for the purpose of expansion of the business.
Know the Answer?