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MGTA01H3 Study Guide - Midterm Guide: Sole Proprietorship, Initial Public Offering, Ontario Securities Commission

Management (MGT)
Course Code
Study Guide

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Fall 2011 Midterm Examination
Professor Hugh Laurence and Bill McConkey
Saturday, October 29, 2011
Name First
(Please print)
Student # Section: Mon Tue Thur(9:00-11:00) Thur (3:00-5:00)
1. Please write all answers in PEN and as clearly and neatly as possible. If you need
additional space, turn the pages over and write on the back of the sheet.
2. Make sure your name, student number and lecture section are correctly entered,
3. Failure to accurately follow instruction 2 will cost you 5 marks!
4. There are three (3) questions.
5. You have 90 minutes to write the exam.
Do not write below for marking purposes only.
Question 1 / 8
Question 2 / 10
Question 3 / 7
SAQ Total /25

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Page 2 of 6
Question 1
Imagine that you wish to start your own business, but are worried about financing the new venture. You
have been turned down for a loan by your bank. You remember hearing in your Intro to Management
course that somehow your customers could help with your financial needs.
Explain how this works. 2 marks
This refers to gaining Trade Credit from your suppliers. Here, you may attempt to get companies
that supply you with goods or services to bill you at a later date. So, you can gather the inventory
that you require to get started, reserving much of your cash to look after other start-up costs,
and pay for your inventory with some of your sales, typically 30 days after buying it from your
You are prepared to start the business by yourself, but are wondering about the legal structure you
should use. Consider the legal structures that are available to you, and explain which one you would
select as most appropriate. Justify your choice. 6 marks
You could conduct the business as a sole proprietorship. (2 marks)
Advantages: It is quick and easy to establish one, as there are no formal requirements. You
just start the business.
Disadvantages: You are personally liable for all of the debts and obligations of the business.
You are the only legal entity involved, so all responsibilities are yours.
Funding depends entirely on your own resources.
You could conduct the business through a corporation. (2 marks)
Advantages: You as the only shareholder of the corporation enjoy limited liability. You may
lose your investment, but you cannot be sued personally for the debts and
obligations of the corporation.
If you need further funding, it may be easier to attract equity funding from
other investors than to borrow on your own account.
Small start-up corporations are offered a preferential tax rate on their
If the business is one that might lead to large liabilities (large borrowings, large lawsuits if
someone is injured or services are not provided properly) a corporation is a better choice.
Otherwise either form is suitable. Students should give some rationale for their choice. (2 marks)
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