BUS 1010 Module 2 Business Ownership Written Assignment Example

Passaic Fire Sauce Company: Choosing a Legal Form, Weighing a Franchise and Reading the Odds for a New Business

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

BUS-1010: Introduction to Business

Mentor Name

Month Day, Year

Passaic Fire Sauce Company: Choosing a Legal Form, Weighing a Franchise and Reading the Odds for a New Business

These answers continue with Passaic Fire Sauce Company, the invented sauce business from the first written assignment. When the two founding cousins started the business in 2022 they operated informally as a general partnership. Now that they have nine employees, a bank loan and an investor interested in buying in, they need to choose a legal form, decide whether to grow their popular tasting bar through franchising, and understand what the evidence says about the survival of businesses like theirs.

Question 1: Which Form of Ownership Fits the Business Now?

The cousins' general partnership was simple and cheap to form, and profits passed directly to their personal tax returns. Its weakness is unlimited liability: each partner is personally responsible for all of the business's debts, including those created by the other partner, and for claims if a customer is harmed by a contaminated batch. Nickels et al. (2016) describe this as the most serious disadvantage of sole proprietorships and general partnerships.

Two alternatives fit their situation. A limited liability company protects the owners' personal assets from the business's debts and lawsuits in most cases, while still allowing profits to pass through to the owners' tax returns. It is flexible in how profits are divided and how the company is managed, and New Jersey's filing requirements are modest. An S corporation also offers limited liability and pass-through taxation, and can allow owners who work in the business to take part of their income as distributions rather than salary, but it limits who may be shareholders and how many, requires one class of stock and involves more formal procedures.

With an outside investor likely to join, the limited liability company is the better choice today. It protects both cousins and the investor, lets them write an operating agreement that spells out each person's share, voting rights and what happens if someone leaves, and keeps paperwork manageable for a nine-person firm. If the business grows enough that payroll tax savings become significant, the LLC can later elect to be taxed as an S corporation without changing its legal form.

Question 2: Should the Tasting Bar Become a Franchise?

The company's small tasting bar in a Paterson food hall, where customers try sauces on empanadas and tacos, has been profitable for two years, and two entrepreneurs have asked to open similar bars elsewhere under the Passaic name. Franchising would let the brand expand using the franchisees' money and effort in exchange for fees and royalties, and franchisees, as owners, have strong reasons to run their locations well.

Research suggests franchising can help young companies grow and survive. Shane (1996) studied firms that began franchising and found that those which expanded through franchised rather than company-owned units were more likely to survive and grew faster, because franchising solved the problem of monitoring managers in distant locations. Franchising also brings costs and risks. The company would need a franchise disclosure document, an operations manual, training and a system for inspecting locations, all of which require money and legal advice. A poorly run franchise in another city could damage the sauce brand that the whole business depends on.

For now, a better step is a licensing arrangement: allow selected restaurants to serve Passaic sauces with the brand on their menus, which builds awareness at little cost. If demand grows and the cousins can document exactly how a tasting bar runs, franchising becomes a realistic option in two or three years.

Question 3: What Do the Odds Say About a Small Business Like This One?

New business owners often hear that most businesses fail within a few years, but the evidence is more nuanced. Headd (2003) followed new employer businesses using Census data and found that about two thirds survived at least two years and about half survived at least four. He also found that roughly a third of the businesses that closed were described by their owners as successful at the time of closing, for example because the owner retired or moved on to another opportunity. Closure, in other words, is not the same as failure.

For Passaic, those numbers suggest neither panic nor complacency. The company has already passed the two-year mark, has customers who reorder and has a bank willing to lend to it. Its main risks are the ones the textbook identifies for small businesses generally: thin capital, dependence on the founders' time and judgment, and growth that outruns cash. The cousins can improve their odds by keeping three months of expenses in reserve, adding an experienced bookkeeper, using free counseling from organizations such as the local Small Business Development Center, and expanding in steps that the business's cash flow can support.

The founders also discussed what success would mean to them. One wants to build a regional brand; the other would be content with a stable business that supports both families. Writing those goals down now will make later decisions, such as whether to take on more investors, easier to settle.

References

Headd, B. (2003). Redefining business success: Distinguishing between closure and failure. Small Business Economics, 21(1), 51-61. https://doi.org/10.1023/A:1024433630958

Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2016). Understanding business (11th ed.). McGraw-Hill Education.

Shane, S. A. (1996). Hybrid organizational arrangements and their implications for firm growth and survival: A study of new franchisors. Academy of Management Journal, 39(1), 216-234. https://doi.org/10.2307/256637