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Business form Illustration 1 & 2

posted Sep 25, 2014, 10:57 AM by Surendra Dhanpaul   [ updated Sep 25, 2014, 10:58 AM ]

Illustrations

   John Doe  Jane Doe
 Cash  3,000,000  2,000,000
 Land and Building  7,000,000  8,000,000
 House Furniture & Appliance  700,000  -----------
 Motor Vehicle  2,000,000  1,500,000
 Bakery Equipment & Building  ------------  3,500,000
     

John and Jane Doe are two separate individuals who both wish to start a bakery with the above resources. These balances are as at January 1, 2004.

Illustration 1

Sole Proprietor

Both persons can simply obtain licence and start their business. John might have a difficulty since he does not have the equipment and building. He therefore might need a loan to purchase the equipment and building to house these. The amount on this loan is $3,700,000 at an interest of $75,000 per year. This immediately puts him and his personal assets at risk. Nonetheless, he can start. Let us assume that he purchased the fixed assets needed on January 1.

Corporation

Either of the two can incorporate the business under a special name. Note that the names of the two should be different. Both of them cannot operate under Doe’s Bakery. The names must be unique. If John incorporates and invests $500,000 in shares (500,000 shares at $1.00 each) and borrows the rest from the bank then the company is completely liable for the loan. The amount on the loan is $3,700,000. The businesses are separate from the owners.

Partnership

Both John and Jane can pool their resources together and open the bakery. The two of them agree that Jane will invest the equipment and building along with $500,000 cash. John will invest an additional $2,500,000 into the business. Jane will have nothing to do with the operations (management) whereas John is the General Manager who will receive a salary of $50,000 per month. They both agreed that fuel will be paid for by the partnership not exceeding $10,000 per month each. They are both unlimited partners. Profit sharing ratio is 50:50.

 

Illustration 2

Sole Proprietor

John Doe
Balance Sheet
As At January 1, 2004
   
   $  $
 Fixed Assets    
 Equipment & Building
 3,700,000  
     
 Current Assets    
 Cash
 500,000  
     4,200,000
     
 Liabilities    
 Loan (Long Term)
 3,700,000  
     
 Capital    
 Investment
 500,000  
     4,200,000
     
Corporation
John Doe Bakery Inc.
Balance Sheet
As At January 1, 2004
   
   $  $
 Fixed Assets    
 Equipment & Building
 3,700,000  
     
 Current Assets    
 Cash
 500,000  
     4,200,000
     
 Liabilities    
 Loan (Long Term)
 3,700,000  
     
 Owners Equity    
 Share Capital  500,000 @ $1.00 each
 500,000  
 Statutory Reserves
 ----------  
 
 
 4,200,000

Partnership
John & Jane Doe Bakery
Balance Sheet
As At January 1, 2004
   
   $  $
 Fixed Assets    
 Equipment & Building
 3,700,000  
     
 Current Assets    
 Cash
 3,000,000  
     6,700,000
     
 Liabilities    
 Loan (Long Term)
 3,700,000  
     
 Capital    
 Fixed Capital

 
 John
 -----------
 Jane
 3,700,000  3,700,000
  Current Capital
   
 John
 2,500,000  

 Jane
 500,000
 3,000,000

 
   6,700,000