Part 1: Comparison of general partnerships and private limited companies

Hannah Simira is employed as a vet and works from 16:00 until 21:00. She also owns and operates a business selling pet care products to small independent pet shops during the day. Hannah does not currently have any non-current liabilities and the net worth of her business is 50,000. She wants to grow the pet care products business by expanding the range of products and is thinking of reorganising the business either as a general partnership or as a private limited company. She thinks that the total amount of equity and/or debt capital required would be 100,000. Hannah lives off the salary she earns as a vet. She does not normally take any drawings from the pet care products business.

Hannah has a younger brother Sam and a sister Vera, who are currently employees of the pet care products business at a gross annual salary of 30,000 each. Sam and Vera each have savings of 10,000 that they are willing to invest in the business. Hannah thinks that all three could be partners in the general partnership or owner-directors of the company. She is also thinking of asking cousins Max and Hakim, who own a thriving plumbing business, to provide the additional funding by investing in the companys shares and/or providing a long-term loan to the company or the partnership.

Hannah comes to you for advice. In your own words write a short report as follows.

Required:

• a.Based on the scenario above, set out the capital and loan sections of:
  • the partnership
  • the company
  • an alternative financial structure for the company.

  Use no more than 100 words.

  (3 marks)

• b.Set out the main characteristics of both legal forms. Note that there is no need to consult the B291 Unit 5 Session 1 Partnership accounts and financial statements pdf document.

  Use no more than 120 words.

  (4 marks)

• c.Comment on the advantages and disadvantages of the characteristics of the legal forms and their implications:
  • for Hannah
  • for Sam and Vera

  Use no more than 240 words. Assesses Unit 1, Session 1, Section 1.2, Section 2.1 and Section 2.3.

  (8 marks)

• d.Comment on the advantages and disadvantages of the characteristics of the legal forms and their implications for Max and Hakim. Explain why Max and Hakim might prefer to provide a loan rather than invest in shares, or provide a loan as well as invest in shares.

  Use no more than 150 words Assesses Unit 1, Session 1, Section 2.1 and Section 2.3