Appropriate Business Structure for Small Business in Fashion Industry

COMMERCIAL LAW
STUDENT ID:
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PART A
Dear John
This is in regards to the discussion on appropriate business structure for the establishment of
small business in the fashion industry.
Before proceeding to the specific advice, I would briefly like to touch on the various business
structures that are possible along with their respective merits and demerits of each of these.
1) Sole Trader- This is a business structure where a given person holds 100% in the business.
This owner is responsible for taking the various business decisions and also is responsible
for bringing in capital for the business. Also, this business structure does not have any
separate legal entity, hence any business liability is essentially the liability of the owner
(Gibson and Fraser, 2014).
Merits of Sole Trader
 One of the key advantages is that the owner has full control on the business and there is no
profit sharing.
 Another advantage is that the legal formalities involved in the formation of this business
are minimal along with no reporting requirements.
 Besides there is no necessity to prepare financial reports and results for the business in any
particular pattern since they is no other shareholder except the owner.
Demerits of Sole Trader
 The owner has to take various decisions and manage all aspects of the business which may
lead to inferior business decision making especially If inferior skills are there.
 The owner has to bring in incremental capital which may be required for the business and
cannot arrange the same through equity dilution.
 The owner would personally be responsible for any business liability that may arise.
2) Partnership – This is a business structure where there are two or more partners who tend to
have ownership in the business and are known as partners. The profits generated by the
business are distributed amongst the partners as per the partnership agreement which

typically outlines the profit sharing. Like sole trader business structure, a partnership is
also not a separate business structure and hence business liability would fall on the
partners (Davenport and Parker, 2014).
Merits of partnership
 There are more than one owners to the business and hence the underlying responsibilities
related to business can be delegated amongst the partners which typically leads to superior
decision making.
 Also, with regards to source of capital also, the onus would not be an a single individual
but with multiple partners, raising of extra capital is easier as compared to the sole trader
business structure.
 The legal formalities involved in the formation of this business structure are minimal since
only a partnership agreement is required which may or may not be registered. Also, the
reporting formalities on a periodic basis are absent.
Demerits of Partnership
 The partners do not have exit options as they cannot sell their stakes to others and will
have no option but to dissolve the partnership firm and form a new partnership firm. This
is an issue even when capital wants to be raised through share dilution.
 Also, since this business structure does not have a separate legal entity, hence the partners
would be held personally liable for the business liabilities.
3) Company – This may be consist of one shareholder (known as one person company) or
may have multiple shareholders which varies according to the type of companies. Unlike,
other business structure, the company business structure is a separate legal entity and
hence owners and the company are separate (Pendleton and Vickery, 2015).
Merits of company
 Considering that there is separation of company and owners, hence the liability of
shareholders or owners is limited to only the equity capital that they have put in.
 Raising capital is easier than in other business structures since shares can be issued to
other private investors or to the public through stock exchanges.