E-Bikes Case Analysis: E-Bikes Offer Exercise and Environmental Consciousness
The bicycle industry is exploring new ways to be both environmentally and user friendly. Taking their lead from electric cars, companies like Schwinn are marketing a line of electric bikes (e-bikes) that have a motor and batteries. E-bikes require significantly less effort than traditional bikes and can go up to 25 mph. The e-bike’s motor is quiet and produces zero carbon emissions. E-bike sales are projected to increase in America as people become more environment and health conscious. Some companies with a long history of producing traditional bikes such as Schwinn are creating a division within the corporation to focus on e-bikes. Other companies such as Ultra Motor Company Limited have chosen to focus solely on e-bikes. This paper will discuss the advantages of private corporations and public corporations related to emerging products such as e-bikes. This paper will also address potential disadvantages of operating as a sole proprietorship for a growing business such as e-bike manufacturing and distribution. The advantages and disadvantages of the different forms of business ownership need to be explored to determine the best fit for a business. 1. Ultra Motor Company Limited is a private corporation. What are the advantages of being private and not being traded on a stock exchange?
As a result of the Securities Exchange Act of 1934, companies that are traded on a stock exchange such as the New York Stock Exchange (NYSE) must register and file certain information with the U.S. Securities and Exchange Commission (SEC). The main objective is to protect investors from deceit and misrepresentation in the buying and selling of securities. Information about the management of the company along with financial statements certified by accountants is provided to the SEC and made available to the public via the EDGAR database (SEC). The SEC’s web site does define some exceptions from the registration and filing requirement such as “private offerings to a limited number of persons or institutions”. Ferrell defines a private corporation as “owned by just one person or a few people who are closely involved in managing the business” and typically the family retains all the stock (101). A corporation is a legal entity whose assets and liabilities are separate from its owners but additional benefits beyond legal issues exist for a private corporation (Ferrell, 100).
Ultra Motor Company Limited has economic, competitive, and managerial advantages that stem from their SEC filing exemption. According to Kieso, the SEC determines the financial statements that must be provided to stockholders and the rules used in producing and verifying the information (26). It is often an ill-afforded added expense for a public corporation to implement and verify the internal controls necessary to follow the SEC’s requirements. Failure to comply with SEC requirements can result in substantial financial penalties. Private companies avoid the financial burden of producing financial statements for the SEC.
A company that is striving to introduce a new product and open up a new market, such as e-bikes, needs to protect company data and the company itself. A private corporation avoids the requirement to publicize current and future activities and therefore retains a level of secrecy in a competitive, emerging market (Ferrell, 103). Owners of private corporations also have more control over the day-to-day operations as well as the overall fate of the company by not having outside stockholders. If Ultra Motor Company Limited was a publically traded company it could be a prime target for a takeover from a company like Schwinn. As a private corporation the voting control through stockholder ownership resided with a limited number of people and an unwanted takeover can be avoided (Kieso, 744). 2. Schwinn is a division of a public corporation and publicly traded company, Dorel Industries. What advantages are there in being part of a public corporation?
Publicly traded stocks allow individuals as well as other corporations to own a piece of corporate giants such as Wal-Mart, General Electric, and Ford. Simply stated by Ferrell, “a public corporation is one whose stock anyone may buy, sell, or trade” (102). The primary advantage of a public corporation is the ability to attract and accumulate large amounts of capital (Kieso, 742). Schwinn can draw on the parent company, Dorel Industries, to provide needed capital for the e-bike opportunity. Investors may purchase additional offerings of Dorel stock on the speculation that e-bikes will be the next personal computer. Capital from the initial sale of additional Dorel Industries stock could be funneled into the future of e-bikes.
Another advantage is that publicly traded stock usually changes ownership through buying, selling, and trading without impacting the management of the corporation. The many diverse stockholders of Dorel Industries are removed from the management of the company and are interested in the bottom-line return on their investment. With Schwinn being a division of a larger, public corporation, it is unlikely that the stockholders would be involved in the managerial decisions of the Schwinn division or influence the development of the e-bike product. 3. What could be a disadvantage of operating an electric bike firm as a sole proprietorship? Brigham points out that “many companies begin as a sole proprietorship, which is an unincorporated business owned by one individual” (5). Sole proprietorships are usually small businesses in service industries such as appliance repair and child care because of the low financial investment (Ferrell, 94). Developing, producing, and marketing a product like an e-bike would require a significant, up-front financial investment. Sole proprietors are generally limited to their own financial standings and that of family and friends to finance the business. This may be fine starting out but since the demand for e-bikes is expected to increase, being a sole proprietorship may limit a firm’s growth and other companies may step in and satisfy the demand.
Another disadvantage of operating as a sole proprietorship is that the owner assumes unlimited personal liability for the debts of the business and rulings of the court system. Unlimited personal liability can result in losses that exceed the initial investment in the company and force the liquidation of personal assets such as cars and homes to pay creditors. Incorporation is not an ‘automatic veil of protection’ from misconduct or neglect by a company (Mohr). As Mohr explains, unacceptable practices such as intermingling corporate assets with personal assets may still result in personal exposure. When compared to the certainty of unlimited personal liability for the sole proprietor, incorporation offers better protection for the diligent owner.
A growing business such as e-bikes needs to weigh the advantages and disadvantages of the various forms of business ownership. An owner may want to have complete control over the business and need the ability to make quick decisions in a fast changing market, thus deciding to operate the business as a sole proprietorship at the risk of unlimited personal liability. Other situations such as developing and marketing e-bikes may require a large capital investment and the owner(s) will need to weigh the benefits of accumulating capital against the risk of losing their competitive advantage. The form of business ownership probably does not matter to the person buying the product or service but it has a significant bearing on the operations of the business and can change throughout the life of the business.
Works Cited
Brigham, Eugene F., Michael C. Ehrhardt. Financial Management, 13th ed. Mason, OH: South-Western Cengage Learning, 2011. Print.
Ferrell, O.C., Geoffrey Hirt, Linda Ferrell. M Business, 2nd ed. New York, NY: McGraw-Hill/Irwin, 2011. Print.
Kieso, Donald E., Jerry J. Weygandt, Terry D. Warfield. Intermediate Accounting, 13th ed. Danvers, MA: John Wiley & Sons, Inc., 2010. Print.
Mohr, Anthony J. "Take care to avoid liability traps." Nation's Business 85.11 (1997): 32. Academic Search Elite. EBSCO. Web. 5 Sept. 2011.
SEC,U.S. Securities and Exchange Commission, Laws and Regulations. Web. 6 September 2011. < <http://www.sec.gov/about/laws.shtml>