Paulo has always loved soccer. A gifted player as a child whose father was equally soccer-obsessed, Paulo only ever wanted to be a professional soccer player. Unlike many, he actually had the talent to match his ambition and at the age of 12 he was invited to join Adelaide United’s elite junior training program. His parents were keen that his academic studies did not suffer and so he was busy either training or studying from age 12-18. Having completed year 12 successfully, Paulo devoted all his energy to training and learning from the older players. While still 18, he was rewarded with his first team debut, coming on as a substitute to score on his first appearance. However his second appearance did not go according to plan, to say the least. Unfortunately Paulo suffered a double leg break that would ultimately end his fledgling career far too early.
Despite several operations and attempts to come back at the same level as before, something just wasn’t the same. Adelaide United were very supportive, but two years after the horrific injury, Paulo reluctantly made the decision to abandon his dream of being a professional player. He still loved the game and wanted to work in and around it somehow. He thought about coaching but to obtain a role as a senior coach he would have to gain more experience first.
Paulo loves children and remembered that he had first started to play soccer as a 4 year old at something called ‘’Little Dribblers’ and he thought he might try and work for them. However, the pay as a helper for a franchise was very low and he also found the terms and conditions of becoming a franchisee unappealing. Having spoken to some neighbours with children, it seemed like there was a bit of a geographical gap in the market in his and surrounding suburbs.
Paulo decided to launch his own soccer training program for local children aged 3-10, to be called “Superstar Soccer”. Paulo has spoken to three local primary schools who are open to an arrangement where he uses their outdoor pitches and indoor sports halls (if needed) three times per week for a payment of $300 per week to each school. They require that Paulo pay the first 12 weeks in advance plus a ‘bond’ of $1000 per school for any damages caused. Paulo estimates that the equipment (nets, cones, soccer balls etc) will cost approximately another $1000. The biggest cost will be a van to transport the equipment around – he has found one for $25,000.
This leaves Paulo with two major issues to resolve; what type of business entity to set up – sole trader, partnership or company – and how to finance the business. Paulo is smart academically and has always been good at managing his own money but he has a limited understanding of business and finance.
Instructions
Assessment Tasks: Imagine that Paulo engages your services as a professional business advisor to prepare a report for him addressing the two key and related questions of which type of business entity to use and how to finance the business.
You must address each of the following issues, and include references to a range of sources beyond those covered in class:
• What are the different types of finance potentially available in this situation?
• What are the strengths and weaknesses of each source?
• Explain the process used to decide the source, or sources you would recommend.
• What are the different types of business structure possible in this situation?
• What are the strengths and weaknesses of each structure?
• Explain the process used to decide the recommendated structure.
• Present the options you are recommending.
Please ensure you consult this assessment’s marking rubric prior the submission of the assessment.
Assignment Solution
Paulo dreamt of becoming a soccer star; however, he was involved in an accident that set his soccer career back. Paulo found a meaningful way to concentrate his efforts and energy by setting up soccer training for children called “Superstar Soccer”. This essay will evaluate the types of business entity that Paulo can form and the funding options for his new business.
Types of finance potentially available in this situation
Paulo can consider using his savings or borrowing money from relatives and acquaintances. This would ensure Paulo control over the business, but the funds may not be enough for is capital (Nguyen & Canh, 2021). Another opportunity is the credit facility where Paulo can secure a loan for his business from a specific bank or credit organization. This would enable him secure the required amount of funding, however Paulo would need to submit a detailed business plan plus show good command of basic business financial literacy plus repayment plan (Gatti, 2023).
Other sources of fund are crowd funding or subsidies from the municipal or local government, or from the sporting authorities. Social networking sites such as kick starter or go fund me are good ways of sourcing capital from a large number of people as gifts or stakes in the firm (Coronel-Pangol et al., 2022). Grants usually provide companies with non-repayable cash for specific use, including acquisitions of equipment or advertising campaigns (Soderstrom & Weber, 2020). Paulo may have to carry a lot of research over the Internet and read more about these options to know if they will work for his business.
In addition, there are some equipment financing that Paulo can use instead of going with the direct purchase of an asset such as leasing and renting of assets. This approach could help to cut the initial outlay costs and could give more flexibility associated with the balance of cash (Rao et al., 2023). Paulo will also be able to negotiate the conditions, which are offered by the local primary schools. He may consider other facilities to cut the cost.
Strengths and weaknesses of each source
Paulo can use his own funds as starting capital. The advantage of this approach is that he can choose to keep his business entirely under his command, and free from debt (Gompers, 2022). However, it also means that he will have to use his savings, which could be a major liability in the short-run if the business takes long to break even (Vernimmen et al., 2022). In addition, full reliance on one’s own funds restricts the business development in terms of size and opportunities for its expansion.
Another method for funding is applying to a bank or other credit organization for a business loan. This approach can help obtain a greater amount of money to improve the quality of equipment or advertising (Ross et al., 2017). Its disadvantages arises with the fact that it requires collateral, which may exposes the business to immense risk in the process (Hillier et al., 2019). There are also repayments on loans and these can form a large drain on the resources of the business.
Another possibility is crowd funding, in which Paulo can collect relatively small amounts of money from a large number of people through the internet. The effectiveness of the crowdfunding is that it helps quickly create a demand for the business, a possibility of pilot testing the idea and receiving feedback from possible consumers (Metrick & Yasuda, 2021). However, the weakness can be identified from the aspect that there is always a guarantee of not being able to raised the required amount while the use of the crowdfunding platform attracts high fees (Palepu et al., 2020).
Another solution is to consider obtaining a small business loan or grant from the government where an applicant may get a lower interest rate and better payment terms. The advantage of this approach is lower costs and possible additional funds and assistance (Metrick & Yasuda, 2021). However the weakness is the process of applying for the grant has a restrictive nature of its availability (Vernimmen et al., 2022).
Lastly, finance could be solved through the cooperation with businesspeople or investors in the specific country where Paulo has the means to attract them. The strength of this approach is that one might get additional expertise, networks and resources and also sharing the risk (Nguyen & Canh, 2021). Its weakness is its inability to fully controlling the operations, which require cooperation with partners and may need Paulo to compromise.
Types of business structure possible in this situation
First, Paulo can manage it as a sole trader. It is easy to establish this structure, and it does not have a lot of bureaucratic leadership (Hillier et al., 2019). However, this would expose his personal belonging to business litigation or debts in case of any default (Coronel-Pangol et al., 2022). He will also be required to file his personal income tax return for which he would also be expected to include the business income in his taxes (Rao et al., 2023).
Paulo can form a partnership, which would entail having joint or partial control with one or more persons. A partnership structure can provide required expertise, resources, and information to enhance the business (Palepu et al., 2020). The partners will also divide the company’s liabilities and responsibilities. However, partnerships have some legal formalities which include partnership deed, which is a legal agreement that determines the working and profit sharing ratio of each partner.
Paulo could also form a company, which is a legal entity distinct from the person or persons who own it. This business structure provides a liability shield, which means that Paulo’s personal assets are safe in the event that business incurs some debt or has liabilities (Gatti, 2023). Companies are also more attractive to investors and can easily obtain capital. However, companies need more complex creation and adherence to the rules such as filing of annual reports and tax returns.
Another type of organisational structure which is available to Paulo is a cooperative. It is a business entity that is owned by several members who have similar purpose or interest (Soderstrom & Weber, 2020). The cooperative will be started by those who have a social or a group oriented agenda that is in line with Paulo’s desire to provide football training program for children in his neighborhood. The legal structure of a cooperative has its advantages such as tax deductions and limited legal responsibility but a legal cooperative is best for those who have the required number of members (Gompers, 2022).
Lastly, Paulo can decide to form Trust. This is a legal entity which acquires assets for the purposes of helping some beneficiaries. Most Trusts are eligible for tax exception and shielding assets (Ross et al., 2017). In relation to program “Superstar Soccer”, the trust could be employed to be holding the business property such as the van and equipment. The profits could be shared to Paulo as the first beneficiary. The establishment of the trusts may entail several legal formalities; therefore, it needs professional legal and accounting advice (Nguyen & Canh, 2021).
What are the strengths and weaknesses of each structure?
A sole trader is easy to form and is frequently used by small business. With Paulo being the sole owner of the business he will control all major decisions of the business and he will own all generated revenue (Metrick & Yasuda, 2021). The business is easy to establish as it requires little paperwork and the tax concerns are also simple (Hillier et al., 2019). However, one disadvantage is that Paulo would be held responsible for any business losses, lawsuits etc and this will be on his personal assets (Vernimmen et al., 2022).
Another form of organization is a partnership, for instance, Paulo can partner with an individual who equally has passion for soccer and with children. This structure would provide means for decision-making, risks and rewards sharing (Ross et al., 2017). It has several advantages for instance it provides a means of consolidation of the resources, experience, and contacts. It also provides a means of division of the load between the partners (Coronel-Pangol et al., 2022). However, the weaknesses are potential conflict between partners, parties have ‘infinite liability’, and they need a written partnership that details functions of each partner (Rao et al., 2023).
Another organizational structure is a limited liability company (LLC) which is more complicated but provides bigger shield to Paulo’s personal assets. First, as a company, Paulo would not be personally liable for the debts of his business as he will be a separate legal personality (Gatti, 2023). The advantages of an LLC include flexibility of membership, pass through taxation, and issuing of share to the public to raise capital (Soderstrom & Weber, 2020). The weakness include longer establishment requirements and documentation, costly as compared to sole traders or partnership, formalities such as company annual shareholders’ meetings and documentation (Gompers, 2022).
Conclusion
Paulo’s enthusiasm for soccer and willingness to educate local children about the game has inspired him to organize “Superstar Soccer”. It is a new business which needs to address such issues as the most suitable organization-type and financing options. Paulo needs to assess his funding options that can sustain “Superstar Soccer” and to achieve his aim of setting quality soccer education and guidance to the children in the community.
References
Coronel-Pangol, K., Orden-Cruz, C., & Paule-Vianez, J. (2022). Bibliometric analysis of alternative financing for entrepreneurship.
Gatti, S. (2023). Project finance in theory and practice: designing, structuring, and financing private and public projects. Elsevier.
Gompers, P. A. (2022). Optimal investment, monitoring, and the staging of venture capital. In Venture Capital (pp. 285-313). Routledge.
Hillier, D., Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2019). Corporate Finance, 4e. McGraw Hill.
Metrick, A., & Yasuda, A. (2021). Venture capital and the finance of innovation. John Wiley & Sons.
Nguyen, B., & Canh, N. P. (2021). Formal and informal financing decisions of small businesses. Small Business Economics, 57(3), 1545-1567.
Palepu, K. G., Healy, P. M., Wright, S., Bradbury, M., & Coulton, J. (2020). Business analysis and valuation: Using financial statements. Cengage AU.
Rao, P., Kumar, S., Chavan, M., & Lim, W. M. (2023). A systematic literature review on SME financing: Trends and future directions. Journal of Small Business Management, 61(3), 1247-1277.
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2017). Essentials of corporate finance. McGraw-Hill.