Merits and Demerits of LLC in Comparison to Other Form of Business

Financial Accounting can be regarded as a specialized accounting process that helps in keeping track of the financial transactions of the companies. After that, with the help of various accounting principles and standards, accountants record and summarize the transactions so that they can be presented in the form of financial reports (Bevis 2013). The main aim of this report is the analysis of the financial information of Next PLC with the help of relevant ratios. Thus, this report provides the scope for the analysis and interpretation of the financial statements of the companies. This report also sheds light on both the merits and demerits of Limited Liability Companies (LLC) in comparison to the other form of businesses.

Merits and Demerits of LLC in Comparison to Other Form of Business

Merits

Proprietors Do Not Have Any Responsibility Towards Company Debts: It can be considered as the most crucial characteristic of an LLC. The proprietors of a partnership or sole partnership business are responsible for the debt of the business. In case the assets of a sole partnership or partnership businesses are not enough to fulfill the obligations of the creditors, they can go after the personal bank account, house and others of the proprietors to get their money back. However, in case of an LLC, the owners do not have any liability in case the businesses run out of funds (Lewis 2013).

It Is Easier for an LLC to Raise Money: An LLC can raise capital from many sources. It has the option to admit new member by selling interests of membership. After that, it can create new class of membership interests with the help of different voting or profit characteristics. The main advantage in this case is that the new investors will not be liable towards the company liability (Gomtsian 2015).

Ease in Transferring the Ownership: Under an LLC, ownership interest can be sold to third parties without affecting the business operations. On the other hand, one cannot sell the businesses of sole partnership or partnership as each assets, bank accounts and licenses need to be transferred individually.

Demerits

High Cost to Set Up Business: It needs to be mentioned that an LLC takes more costs to be established as compared to sole proprietorship or partnership businesses. For example, the setting up of an LLC includes high costs like initial formatting fees, fitting fees and others (Mancuso 2017).

Formal Organization: As compared to sole proprietorship or partnership businesses, an LLC requires more paper work. A sole proprietorship or partnership business can be commenced even without an handwriting agreement in the presence of any formal organizational procedures.

Merits

Separate Records: It is needed for the owners of an LLC to maintain separate records with the aim to liability protection of the members. In addition, the owner of an LLC is needed to keep his/her personal affairs separate from the business of LLC (Schwarcz 2014).

Analysis of Ratios

Profitability Ratios

As per figure 1, slight fluctuations can be seen in the gross profit level from 2014 to 2018. However, as per figure 2, a decreasing trend can be seen in net profit ratio from 2016 to 2018; and it is not a healthy situation for Next PLC (nextplc.co.uk 2018). There is a need for effective strategy for the company to revive the profitability situation.

Liquidity Ratios

According to figure 3 and figure 4, major fluctuations can be seen in the case of both current and quick ratio; and this aspect indicates towards the instability in the liquidity position of Next PLC. In the year 2018, decrease in both the current and quick ratios can be seen. It implies that there is a decrease in the capacity of Next PLC to satisfy their present business obligating in the recent years (nextplc.co.uk 2018).

Investors Ratios

According to figure 5, there is deistic decrease in the interest coverage ratio of Next PLC in 2017 and 2018 from 2016; and there was an increasing trend in this ratio from 2014 to 2016. The same aspect can be seen from figure 6 as decreeing trend can be seen in debt to equity ratio in 2017 and 2018 from 2016. On the overall basis, fluctuation can be seen in this ratio over the last five years that is not good for the business of Next PLC (Delen, Kuzey and Uyar 2013).

Working Capital Ratios

According to figure 7 and figure 8, a major decreasing trend can be seen in both inventory turnover ratio and accounts receivable turnover ratio. This aspect indicates towards the unhealthy working capital condition of Next PLC in the recent years. For this reason, the management of Next PLC can face difficulties in conducting the daily business operations in the lack of adequate working capital (Brooks and Mukherjee 2013).

Future of Next PLC in UK Clothing Retail Industry

The future of any business depends on certain factors like profitability, liquidity, working capital and others. In case of Next PLC, the presence of problems can be seen in these major areas. It is not possible for the business organizations to survive in the presence of these issues. Thus, it can be said that Next PLC does not have a bright future in the UK retail industry in the presence of these financial issue. In order to secure a bright future, the need for Next PLC is to develop effective financial strategies so that the financial issues can be overcome (Brooks and Mukherjee 2013).

Recommendations

Followings are the major recommendations for Next PLC to strengthen their situation in the above-discussed financial areas:

• The management of Next PLCneeds to identify the most productive products that need more concentration and needs to eliminate the unprofitable products. This will help in increasing the sales that can lead to increase in gross profit. Moreover, Next PLC needs to develop strategies to reduce direct costs and overheads as it is helpful in improving the profitability condition.
• In order to improve the liquidity position, it is recommended to Next PLC to negotiate with their creditors about longer payment terms. At the same time, it is needed for them to remove the unproductive assets as it will lead them to use their money in the productive assets. Most importantly, it is needed for Next PLC to use long-term debts for raising capital for their business. It will improve in their current and quick assets.
• It is recommended to Next PLC to pay off some of the existing debts with the aim to decrease the amount of borrowings. This process will help the company in improving their interest coverage ratio. Apart from this, in order to maintain a stable debt-to-equity ratio, it is needed for the management of Next PLC to maintain an optimal mix of equity and debt in their capital structure. This will reduce the overdependence of the company on one of the medium for raising capital.
• In order to improve the inventory turnover ratio, the management of Next PLC needs to clear their business inventory; and it can be done with the help of reduction in cost, review of the pricing strategy and others. In addition, it is needed for the company to ensure speedy collection of their receivables from customers. These will help in improving the working capital of the company.

Conclusion

It can be seen from the above discussion that LLC provides some major advantages as compared to other forms of business; but, the owners are also needed to consider the disadvantages of this form of business. In addition, as per the above discussion, Next PLC has certain financial problems in the areas of profitability, working capital, investor ratios and liquidity. For this reason, the company is needed to consider the provided recommendations to revive the situation.

References

Bevis, H.W., 2013. Corporate Financial Reporting in a Competitive Economy (RLE Accounting). Routledge.

Brooks, R. and Mukherjee, A.K., 2013. Financial management: core concepts. Pearson.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Gomtsian, S., 2015. The governance of publicly traded limited liability companies. Del. J. Corp. L., 40, p.207.

Lewis, W.A., 2013. Waiving Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies. Fordham L. Rev., 82, p.1017.

Mancuso, A., 2017. Nolo’s Quick LLC: All You Need to Know About Limited Liability Companies (Quick & Legal). Nolo.

Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2018. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2018/annual-report-and-accounts-jan-2018.pdf [Accessed 10 Nov. 2018].

Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2017. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2017/Copy%20of%20WEBSITE%20FINAL%20PDF.pdf [Accessed 10 Nov. 2018].

Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2016. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2016/NEXT-Annual%20report%20Web%20FINAL.pdf [Accessed 10 Nov. 2018].

Nextplc.co.uk., 2018. [online] .Annual Report and Accounts JANUARY 2015. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2014/next-annual-report-2015-final-web.pdf [Accessed 10 Nov. 2018].

Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2014. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2013/next-ar2014-web.pdf [Accessed 10 Nov. 2018].

Schwarcz, S.L., 2014. The Governance Structure of Shadow Banking: Rethinking Assumptions About Limited Liability. Notre Dame L. Rev., 90, p.1.