Compare and Contrast Two Types of Business Ownership - Term Paper Example

? Compare and Contrast Two Types of Business Ownership al Affiliation In this paper, two forms of business ownership, namely; sole proprietorship and partnership are discussed. Sole proprietorship is the easiest and simplest form of business to start. However, it has its advantages and disadvantages. Advantages of sole proprietorship include the facts that it is easy to form, has little or no formalities, and there is no taxation for unemployment. Disadvantages of sole proprietorship on the other hand include the facts that since it is owned and managed by a single person, it seriously suffers for its debts and losses, capital cannot be raised by selling interests of the business, and the business has no continuity after the owner has died. Every business commences in its own way and can be terminated at a particular time, and for various reasons. Sole proprietorship type of business can be terminated through; owners death and by contract. Unlike sole proprietorship, partnership requires two or more people. It also has its advantages and disadvantages. Advantages of partnership include the facts that it’s easy to start, and has no need for annual meetings. Its disadvantages on the other hand include the facts that owners are subjected to unlimited liability, and it leads to disputes. Nevertheless, these two forms of business have their similarities. Similarities include the freedom that both businesses enjoy from government regulation, and on determination of duration of business. Keywords: Sole Proprietorship, Partnership, Partner, Business, Liability There are a wide variety of businesses recognized worldwide. Business may be established with the aim of making profits, or helping a particular group of people without making profits. In this paper sole proprietorship and partnership forms of business ownership are discussed. Spadaccini defines sole proprietorship as “a business owned and managed by one person” (2007 p.4). Sole proprietorship is one of the easiest types of businesses to start; it is also a very popular form of business worldwide. It is not a legal entity, thus the owner of the business is fully responsible for its profits and debts. The business fully operates under the name of the owner or by use of an artificial name. The owner of a sole proprietorship type of business only needs to register his/her name and get a good location, and the business can begin after this process. He is fully liable for all the debts and profits incurred; if a sole proprietor gets into a financial crisis, the creditors can sue the owner of the business, and if this lawsuit is successful, the business owner will pay all the debts. Sole proprietorship has no entity separate from the owner; this means that if the business owner signs a contract, it will only be under his name. Advantages of a sole proprietorship business include the facts that formation of the business is quite inexpensive and easy, carrying very minor formalities since it involves only one person. Employment tax is not charged on sole proprietorship types of businesses and owners exercise a lot of freedom since they may “freely mix business and personal assets” (Spadaccini, 2007, p.5). However, despite being the easiest type of business to start, sole proprietorship has a number of disadvantages. These include the facts that sole proprietors cannot raise capital by selling interests from the business, business liabilities and other personal liabilities for debts and losses are unlimited, and it is quite impossible for the business to continue, if the owner passes away. Sole proprietorship can either be terminated by contract or if the owner dies. In case the sole proprietor gives up the business, sells it, or passes away, the existence of the business ceases (“Types of Business Ownership,” n.d.). Spadaccini defines partnership as “a business organization formed when two or more persons or entities come together to operate a business for profit” (2007, p.5). Partnership can be formed through various methods such as handshakes, oral agreements, written agreements, and when people engage in a joint business. Key factors about a partnership are that it is owned by two or more people, and partners can act on behalf of the other partners. For example, by hiring employees, the partners share profits and losses, and the business can only commence when two or more people exist in the business. There are different types of partnerships that come from the nature of the business. Partnerships may be particular or universal when classified according to object. They may also be limited or general when classified according to liability, and at will or for a fixed term when classified according to the business’s period of existence. Partners in a partnership type of business can be classified into different classes according to contribution, liability, or other classifications. General limited partners, general partners, and limited partners are classified according to liability. Capitalists, capitalist partners, and industrial partners are classified according to contribution. Partners may also be classified as dormant partners, nominal partners, secret partners, silent partners, liquidating partners, ostensible partners, and managing partners. In a partnership type of business, each partner has an obligation to act in the best interests of the business (“An Overview of Available Business Structures’” n.d.). The partnership type of business ownership has a number of advantages. This comes from the facts that, just like sole proprietorship, the kind of business is very inexpensive and easy for the partners to start, since they are able to consolidate their resources together. The business involves very minor formalities and does not hold any annual general meetings. Taxation is very fair on partnerships involving small businesses, and the business is free from charges such as minimum taxes that are usually charged on Limited Liability Companies and corporations. Partnerships however have a number of disadvantages. These include partner’s subjection to unlimited personal liability, which is very common, except in cases where the partnerships and liabilities are limited. Partnership types of businesses also experience disputes from time to time arising from differences among the different partners and finally “Individual partners bear responsibility for the actions of other partners” (Spadaccini, 2007, p.6). Unlike a sole proprietorship type of business ownership, a partnership can be dissolved through “(1) mutual agreement, (2)withdrawal of partner, (3) death or insanity of a partner, (4)bankruptcy of a partner, (5) bankruptcy of the business, (6) termination of the partnership agreement ,(7) court order, or (8) war between nations of the partners” (Medina, 1988, p. 38). There are various similarities and differences between sole proprietorship and partnership types of business ownership. Differences between sole proprietorship and partnership include: 1. Sharing of profits and losses. In partnership, a profit appropriation account is used to ensure that the net profit from the business is fairly divided among partners (Denny, 2003). The profits are shared according to a method agreed upon by the partners. Sole proprietorships on the other hand use statements of retained profits. In this type of business, whether profits are made or losses are incurred, they only affect the owner. The sole proprietor enjoys the privilege of withdrawing money at any desired time, and without making any consultation, so as to meet his subsistence and personal living expenses. 2. Membership requirements. Sole proprietorship is a business owned and dominated by one person, while in partnership, the business is owned by more than two people referred to as partners. 3. Necessity of agreements and formalities. In partnership, an agreement is necessary; this agreement can be expressed or implied. In a sole proprietorship, there is no need for an agreement or any formalities to start the business. 4. Registration. In sole proprietorship, the need for registration is eliminated, but in a partnership there is need for registration; this registration has advantages. 5. Management of the business. In the case of a partnership, all partners have equal rights to exercise their management skills, while in sole proprietorship the owner is the only management; he is the final decision maker in the business. 6. Risk. In sole proprietorship, the owner is fully responsible for all the risks the business incurs, while in partnership, the partners share all the risks that the business faces. 7. Starting capital. In partnership, all partners contribute capital for formation of the business. The partners gather their resources so as to efficiently run the business. On the other hand, in sole proprietorship, the owner is the only one who contributes for the capital (Das, 2012). 8. Secrecy. In sole proprietorship, there is complete secrecy in the business; this is because the owner doesn’t share the business secrets with anyone. On the other hand, in partnerships, all the business secrets are shared among the partners. 9. Uncertainty. “The life of a partnership is more uncertain than the sole trader” (Maheshwari, 2003, p.163). A partnership is formed on trust and faith. On the other hand, a sole trader does not have to be uncertain of a number of issues, except for the ones he/she has no control of. Various similarities between partnerships and sole proprietorship types of business ownership exist. These include: 1. Freedom from control by the Government. Sole proprietorship and partnership types of businesses are free from government control. 2. Freedom of business period of existence. Sole proprietorship and partnership are both easy to form and terminate. 3. Business capital requirements. Capital required for starting a sole proprietorship and a partnership is little. This is more advantageous when no capital is required for expansion; hence starting both types of businesses is very inexpensive. In conclusion, sole proprietorship and partnership types of business ownership share a number of similarities. However, the ways in which both businesses are formed and the way they operate are different. Reference List “An Overview of Available Business Structures’.” (n.d.). umanitoba.ca. Retrieved December 22, 2012, from http://www.umanitoba.ca/afs/agric_economics/MRAC/structures.html. Das, Bipin. (2012). What are the Differences Between Partnership and Sole-Trade Business? Retrieved December 22, 2012, from http://www.publishyourarticles.net/knowledge-hub/business-studies/what-are-the-difference-between-partnership-and-sole-trade-business.html. Denny, Ralph. (2003). Accounts for Solicitors 2/E. Portland: Cavendish Publishing Limited. Maheshwari, P. R. (2003). Principles of Business Studies Vol I. New Delhi: Pitambar Publishing Company. Medina, Robert. (1988). Business Finance. Quezon City: Rex printing company, Inc. Spadaccini, Michael. (2007). Business Structures: Forming a Corporation, LLC, Partnership, or Sole Proprietor. New York: Entrepreneur Press. “Types of Business Ownership.” (n.d.). emporia.edu. Retrieved December 22, 2012, from http://www.emporia.edu/dotAsset/0aad93ca-ac13-4111-bbd9-f9bba738c7d9.pdf. Read More