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Hari!

So, are there any shrewd business folks in here? I have a short case problem that my prof wants us to write an essay on and I`m totally lost becasue he didnt really cover any of the material that is in this case problem.

Anyway, if someone would like to throw two cents on a case problem I would appreciate it. Once I understand the gist of what you write I can then put it in essay format.

In return I can send out some great MP3 CD`s, give ya an email account..I`m sure we can come up with something

It may even turn to a nice business debate If anyone wants to stab at it I can scan it in and post it.

You asistance is much appreciated!

Haribol!
brajamani

Radhe Radhe!

I can take a look... send it on over.

Rasaraja dasa

Much thanks RasarajaJI:


A BUSINESS CASE
The Acme Engineering Company
Robert Reilly is the owner of the Acme Engineering Co., a sole proprietorship that has been in operation for seven years in a city of a million people. After graduating from college with a degree in mechanical engineering, Reilly worked for three years in the engineering department of a large corporation. Finally, he decided to start his own company. During the past seven years his firm has rendered consulting engineering services for the construction of more than 40 large buildings. In addition to his consulting business, Reilly is also the agent for a well-known conveyor-belt manufacturing company and has a dealership for Kamron mechanical-lift forks, which are considered a very reliable item.

Last year, Reilly's company made a net profit, after taxes, of $147,000. That was the third consecutive year in which the firm enjoyed a 10 percent growth in total revenue. In fact, the company is now at the stage where it can't take on additional projects of any consequence until at least two more engineers are employed. But engineers are difficult to find, and very often do not want to work in a sole proprietorship because it does not provide them an opportunity to invest in the company. Mr. Reilly has been aware of this situation for several years, having lost two of his best engineers for this reason. However, he is uncertain as to what to do about it.

A few days ago, one of the largest producers of electronic and mechanical valves and switches used in industrial plants offered Reilly an exclusive dealership for the entire state. Reilly estimates that this would require the construction of a fireproof warehouse and about 6000 sq. ft. of additional engineering and office space. And it would entail adding at least two engineers immediately.
Fortunately, Reilly has no immediate space problem because he recently constructed a warehouse and office building on a ten-acre tract near a freeway. However, he estimates that in another year, the company will need additional warehouse space and a new loading dock, all of which will require an additional expenditure of $300,000-and the company cannot finance this. The most recent audit report shows the following:

BALANCE SHEET-Acme Engineering Company, March 31,20_
Assets
Cash $50,000
Accounts Receivable 600,000
Factory Inventory 60,000
Bldg. and Office Furniture 62,000
Total $772,000

Liabilities
Accounts Payable $175,000
Notes Payable 15,000
Mortgage on Bldg. 160,000
Capital and Surplus 422.00
$772.000

Since Reilly does not have additional capital to build the new facilities, it has been
proposed that he borrow the money on a long-term loan. However, capital is tight and interest rates are high-well above the 5% mortgage on his office building. A local banker has suggested the possibility of incorporating.

Reilly's attorney estimates it would cost $5,000 to form a corporation, and about $1,000 to form a partnership. In either case, it seems possible that Reilly can obtain additional capital. Actually, the pressing need for expansion seems to depend on whether he takes over the new product-line or continues with only the present line.

1. What should Reilly do?
2. How would changing the existing form of legal ownership help Reilly?
3. Which form of ownership offers greater possibilities of raising capital five years from now?

He's definitely going to have trouble with the company name. A certain Mr. Wile E. Coyote appears to own all variants on "Acme." Not to much avail mind you--their products seem to always fail.

Sure is interesting to read this as it is a pretty good description of my own company, a successful partnership needing to move to the next level.

hahahah, now THAT was good I almost spilled my tea..

I didn't realize but there is actually a whole set of rules behind those cartoons.

sole proprietorship is not advisable for liability reasons. partnership would be ok if he had the right people as partners, but that would not really solve his financial problems. for raising money incorporation seems best.

(I'm a VP in charge of operations for a $4 mil/year scientific service company but certainly not the biggest financial whiz around )

Moving this over under COMMUNITY, MODERATION AND FEEDBACK. I believe this fits better under "Community".

I think they are looking to factor in this also though:



Getting two or more partners on board would change his financial position, at the very least (assuming they are active, working partners) by increasing the number of engineers they have and, thus, their revenue. If those partners also have money of their own to invest, then he does have a further opportunity to increase revenue.

As for incorporation, I wonder whether it would really give him sudden access to funds in the "real world"? For a bank, what is the difference between a sole proprietor who has been in business for some time and a newly formed corporation? Does a slip of paper and a few days make that much difference in how they see the business? I wonder too, whether a bank would prefer a sole proprietor due to the fact that he is liable, i.e. has more assets that are at risk when he borrows? (I don't know anything about bankruptcy law though.)

I say private corporation is the way to go, offering shares to the prospective engineers. Incorporating offers many benefits in terms of taxes and regulations over individual proprietorship. Keeping it private and offering the shares he wishes leaves him with the most shares and the most control, with the option to buy out the others in the future if it is not working. He will be able to keep the engineers if they buy in, as they will share profits.

Banks will take into account the history of the company in their loan considerations, but offering shares to the new engineers may substantially reduce the loan needed.

Shares can also be sold to other employees.

My company did well with the private corporation route. It also leaves the option of going public later.

there are significant differences in legal status and accounting rules that make all the difference for the banks, especially down the road.

sole proprietorship goes both ways - the owner can freely siphon off loan money for personal use.

as to the human resource factor: partnership is only better if you have the right partners - otherwise it is more a trouble than a benefit. and it does nothing for you in the bank (long term financing). yet, partnership can raise immediate cash (each new owner essentially brings new money to the company, but the amount is limited by the current net value of the company) - of course, if you can find working partners with cash... you can have minority partners too (owning less % of the company than you) - especially if you want to keep the control of the company.

the whole thing has a lot of "ifs"...

if you cant get a loan as a new corporation and have a good partner: go for partnership first and then incorporate for the future...

>the whole thing has a lot of "ifs"...

Yes there is no "Wrong" answer.

I got this from another forum :

Well, from where I sit there are three different problems that need to be addressed.

#1 What does he want to do? that is, does he want to run a bigger company or is he pretty happy with $150,000 profits in a year

#2 If he chooses to grow he needs the flexibility to attract and retain qualified employees. Apparently his exisitng business structure is getting in the way of doing that - considering he is in a city of a million people there should certainly be at least qualified employees around so....

#3 If he chooses to grow he needs to generate cash to finance expansion (but not right now).

In my opinion (and depending on a few factors), incorporation is probably his best bet even if he doesn't decide to expand. Here are some things to consider:

#1 Tax implications. As a sole proprietorship his taxes are likely linked directly to the income of the company - ergo he's paying full-choke income tax on any profits of the business. By incorporating the business and paying himself a consulting wage he can retain earnings in the corporation itself and write down the profits of the corporation through other potential creative mechanisms the state/federal government may have for doing that.

#2 Personal wealth implications. Growing the retained worth of a corporation will grow the value of the shares that he has in his company. He may be able to borrow against that value or something for his personal life.

#3 Legal implications. One of the fundamental pillars of corporation law in any country is that the corporation insulates the shareholders from the solvency of the company. Corporations can sue and be sued, but unless there is another agreement in place the directors are not personally liable in the event the corporation loses the lawsuit. There are other advantages and disadvantages depending on which country Reilly lives in.

#4 Raising capital. It is a myth that a simple corporation can raise capital more easily than a sole proprietorship - it's about the same either way. Without knowing what his cash flow situation is like, in many cases for businesses with limited cash flow and limited cash in the bank the directors of the company are required to sign personal guarantees to assure the repayment of the loan. This problem minimizes some of the advantages in #3 in the short term BUT BUT BUT.......if the corporation grows substantially it may be able to borrow on its own merits and thereby increase the isolation that Reilly has from the financial activities of the business. Further, additional investors may be attracted to the business through ownership incentives....read #5 below for more information on this.

#5 Ownership issues. If his lawyer is worth his weight at all, Reilly's lawyer will advise that more than one class of share be set up. Each class of share has different responsibilities and priveleges within a company. For example, they may decide to set up an 'A' class of shares that is reserved for owners and is called a 'voting' class (owners of these types of shares are allowed to vote on a corporate level). A 'B' class of shares may be a dividend paying, non-voting class (corporate governance documents may decide that 75% of the profit of the corporation may be distributed to the B class shares and paid quarterly or something). In the event that Reilly wants to bring on investors for non-conventional financing he may issue some combination of class A and class B shares to his investors. The value and mechanics of this process are left to the imagination of the reader.

Ultimately getting the business out from under the sole proprietorship and into a corporation allows Reilly to create a lot of business flexibility. A partnership is not much different than a sole proprietorship except that ownership is legally split between two or more proprietors (so if there was a 30/30/40 split in ownership, the legal liability would also be 30/30/40 in the event of default).

Anyway, there should be some food for thought in here. This is my perspective on the situation as a Canadian and some of my assumptions may not be credible in all legal jurisdictions so you would need to check with an instructor or course text for more reliable information on some of the considerations I've brought up here.

You did do some work on this yourself, right? Or is this your own business strategy at work--you get everyone else to do everything for you but claim the credit! Very smart technique, just don't become a PHB.

LOL, thats pretty good.

No, Of course I`ll do the work. It would have to be justified if the prof asks me a question about it so I better undersand something.

I just find that differrent viewpoints are the way to go and this is an intro class and it is filled only w/ 18-21 yr olds so I cant relate to them to discuss the topics since I`m twice that age They be too buzy on da cell phone texting thier homies.