Currently being a sole proprietorship, Jones' company might have to incorporate in order to expand the business and adapt to an ever changing and dynamic task environment. Any company with a taxable income over $50,000 should incorporate. 1 This step is necessary due to the great sales volume of $11,320,000 made by Jones' firm in the past year. 2 A private corporation would be the best type of corporation because of the moderately small size of the company. The shareholders would be limited to Jones, his managers, and a few potential investors.
Jones can sell off at most 49% of his company at which point he still has the majority of the vote on any decisions left up to the shareholders. Moreover, Jones being the sole proprietor, when incorporated, can appoint whoever he wants (including himself) to be on the board of directors. Therefore, shareholders would not be able to sell shares without the approval of the Board of Directors (Jones and his elected directors). Jones benefits from limited liability.
Unlike the sole proprietorship, where the business owner assumes all the liability of the company, in the corporation, an individual shareholder's liability is limited to the amount he or she has invested in the company. The corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes. When Jones' company incorporates, there will be a greater ability to raise money, which will make it easier for the business to grow and develop.
While corporations can borrow and acquire debt like any sole proprietorship, they can also sell shares (reduce ownership) and raise equity capital, a big advantage because equity capital usually does not have to be repaid and incurs no interest. A greater efficiency of management will be attained as a result of the incentive of the managers being part owners of the company. * Tax deferral will be possible, meaning Jones can put off paying some tax until a later time. Also, it is probable to carry out tax savings if the shareholders are in a lower tax bracket, or if the tax rates have fallen.
A small-business deduction will most likely apply to Jones' corporation from carrying on an active business in Canada. Only about 25% tax will be paid on the first $200,000 of annual taxable income. Jones still has full control of the company, leaving the power structure the same way it was before incorporation. When setting up a corporation, numerous legal and startup costs arise. There is a possibility that incorporation may actually lead to tax disadvantages for the business. These tax disadvantages being double taxation, personal tax credits and the need for Jones to fill out two separate tax forms.
If director's liability insurance is taken out. This of course, has a steep price associated to it. Because of government requirements, more paperwork has to be done. This causes costly legal and accounting fees, as well as more time-consuming and hence, costly operations. 3 Jones' lawyer suggested some truly superior advice. Through the incorporation of Jones' company, the main problem and most satellite problems are solved. The company's three invaluable managers will stay with the corporation due to their vested interest in the organization.
With the added capital, the company will be able to expand and possess the funds to expand the plant and purchase new equipment. If Jones chooses to be on the Board of Directors, he'll have even more responsibility than ever before; but if the company grows as a result of the incorporation, Jones will be able to hire workers that could aid him. Since Jones' company isn't a massive corporation, he'll most likely save on taxes, which would maximize efficiency. In this alternative the pros greatly outweigh the cons. Given the advantages and disadvantages, incorporation directly and indirectly solves the main and satellite problems.
Therefore, choosing this alternative would prove to be a wise decision. Related Diversification Related diversification would entail the expansion of Jones' product line beyond plastic paperweights into a related field of industry. This approach requires: the picking of the new industries to enter and deciding on the means of entry, initiating actions to boost the combined performance of the businesses the firm has entered and also pursuing opportunities to obtain a competitive advantage, and establishing investment priorities and steering corporate resources into the most attractive business units.
The paperweight business is not a large market. This statement is based on the simple reason that people can only have so many paperweights before they become unnecessary, and paperweights are not a good that will be used up and need to be bought every few weeks or months. The best area Jones' firm can expand into is plastic moldings and plastic office supplies. Pros. Since Jones' firm lost its competitive advantage (production technology) in its own market, he can cut its losses by focusing on another field.Not spending capital on the purchase of new equipment and expansion of the building saves money.
The paperweight division's research and development skills can be used to improve the new divisions products. The same manufacturing facilities, distribution channels, advertising campaigns, etc. can be used in order to create a competitive advantage.The joint strategy can lower prices, ultimately attracting more customers to both sections. Cons. The costs associated with this change, including the training required for the employees will be two fold. Time and money is required. * Finding a niche in a new market is not something one can do blindly.
Costly research will be required.Jones will be overloaded with responsibility; he will most definitely have to hire a few more managers to give him a hand. Focus on the new section might cause less attention on the existing one, leading to the downfall of the current production line. Upon closer observation of this alternative, it may not be as beneficial to the future of Jones' company as believed. It would help solve the main problem through expanding the company into a new market and once again giving the company a competitive advantage by lowering production costs.
This alternative would actually worsen the satellite problem of Jones having too many tasks, it would just add more. The rest of the satellite problems will not be solved. The great amount of expenses that must be paid in order to implement this alternative, the company does not have. Although this alternative solves the main problem, given the advantages and disadvantages and what was said above, this alternative is not in the best interests of the company if it wishes for a successful future. Recommended Solution
In order for Fred Jones to expand his firm and adapt to an ever changing and dynamic task and general environment he must at first, privately incorporate the sole proprietorship. The next step would be to react accordingly to the threat of competitors having better equipment. Purchasing the new equipment and facility for $13 million with the acquired capital attributable to incorporation would give back Jones' competitive advantage. This implementation of this combination of alternatives solves the main problem and all of the satellite problems to a certain degree.
Through an evaluative process called SWOT analysis, management will better understand their strengths, weaknesses, internal and external environment. With all these factors management will be better equipped to familiarize this corporation within it's organizational environment. Jones' invaluable managers will remain with the company and try to make the company succeed the best it can because of their ownership within the corporation. As a larger firm with greater capital resources, Jones will be able to hire about two managers can help him to fill the managerial roles.
With the purchase of the new equipment and facilities Fred Jones will keep his company's edge against competition by reducing production costs. Also, with the new equipment there will be no worry of strain on old equipment and no worry of reaching a production ceiling in the next two to three years (but rather in 20 years). Recommending the two alternatives private incorporation and the purchase of new equipment and facility is better than simply choosing one solution. This is because they support one another.
Private incorporation gives Jones the fiscal resources he needs in order to buy the new equipment and facility. While the upgrade alternative, solves the problems that incorporation does not (some of the primary problem, and the third and fifth satellite problems). Related diversification would put Jones' company above and beyond the competition, but the numerous startup costs that are related to this alternative are too great. Perhaps this alternative would prove beneficial somewhere down the road when Jones' corporation acquires enough wealth. Implementation Immediate Action:
The immediate action that will be taken by the Jones is to call a meeting and educate his managemers in the areas of SWOT. By doing this, it will ensure that all managers understand the dynamic environment that they are facing and it will help them form plans for the future. By the end of the six months, the company's situation should be analyzed in terms of SWOT and their weaknesses and threats will be evident. Jones should immediately create a private corporation with a board of directors including himself. The three invaluable managers should be approached first and asked if they agree to the terms of the corporation.
Jones should also approach the business people within the community who have shown interest in investing their money into the company. Once the investors have supplied their money, Jones should approach them with his plans for expansion. Short Term Action: The company will be able to adapt to the environment with their findings previously using SWOT analysis. With or without the approval of the investors, Jones has the money to buy the new equipment and facility. Jones' company should move into the new facility in no longer than 12 months.
When in the new facility, the workers will be trained in using the new machinery. Job descriptions were new upper management position should be developed. An internal and/or external recruitment process should be established. Long Term Action: In the long term, Jones' paperweight corporation will back on top of their market. The company will continue to use SWOT as a major factor in analyzing the industry and environment in which they operate. The new managers will be hired through a series of interviews. This new plan will provide a prosperous future for the firm.