Business Functions - The Three Types of Business Ownership - Essay Example

BUSINESS FUNCTIONS By Location Word count: 1593 words Business functions Introduction Business functions refer to the structure that a business idea should take that is legally acceptable when a business is about to begin operations. Choosing a business is very important as the time business that one chooses dictates how much income tax the business would have to the government. This can lead to a company registering either loses or profits depending on the type of business entity that an entrepreneur registers his/her company. The business structure that an entrepreneur chooses to register at the beginning of a business also dictates the amount of paperwork that should be done because the documents filed at the beginning of each business tend to be different in volumes. A business entity chosen should also draw from how much personal liability is involved and the entrepreneur’s ability to raise the capital required to begin the business because each entity requires a certain amount of initial capital. The various types of business include, the sole trader or proprietorship and partnership, which fall under the unincorporated firms and the private limited company and the public limited company that are under the incorporated firms’ category. With this, this essay will delve into the different types of businesses and their definitions and will also describe the three different types of business ownership with examples where possible. Lastly, the essay will further focus on the factors that should be considered by an entrepreneur when starting a business. 1. The different types of businesses Ideally, determining the type of business structure that an entrepreneur should choose draws from the way in which the chosen organization will meet his/her needs. Additionally, the type of business structure that an entrepreneur chooses depends on whether they want to run the same on their own or with the help of partners and associates. The three main business types, namely sole proprietorship, corporations and partnerships are discussed below. In essence, the sole trader type of business is the simplest of the three as it is easy to start and does not require too much paperwork while in partnership business form, ownership is shared between partners that contribute towards the start of a business based on a common business idea that they might have had. Incorporation is the other business structure where a business becomes a legal entity in which the shareholders of the same do not become legally liable for the activities, debts, or responsibilities of the corporation. 2. The three types of business ownership i. Sole proprietorship The sole trader type of business is the simplest of the three as it is easy to start and does not require too much paperwork. In setting up this business type, a sole trader does not have to meet any legal requirements except for the basic permits required when setting up a new business. The beauty of this business is that the trader gets to enjoy all the profits they make while trading, but they however remain solely responsible for the debts and other obligations related to the business (Pride, Hughes & Kapoor 2013, p. 127). A sole trader may also lose their personal or business assets in the event that they are unable to pay their debts to creditors as a way of clearing the same. A sole proprietorship is the easiest to set up because the capital required at the start of this business is relatively low as compared to the other business types. The decision making function, squarely lies with the sole proprietor making them to be in direct control of their business. However, the business may discontinue in the event that the trader is not available leading to the business registering losses or when the trader misappropriates the money that belongs to the business. ii. Partnership Partnerships require that there be a legal document that explains the functions and responsibility of each partner, which is referred to as the partnership agreement. The agreement also dictates the terms of business that an individual might have with their partners in the event that the partnership is dissolved, which protects the investments made by each partner. Within a partnership, there might be sleeping partners and limited liability partners where they do not participate in the daily running of the business neither do they have a responsibility towards the debts that a business might incur. This implies that it is necessary for business to state the terms of operations within a partnership so as to ensure that unnecessary disagreements do not occur during the business life. iii. Corporations Before a business decides to go the incorporation way, it is always advisable for the shareholders to seek legal advice so as to be aware of what it is getting into. Incorporated firms take two forms, namely the private limited company or the public limited firms. a) Private limited company Unlike a sole proprietorship where there is unlimited liability, liability in this business structure is limited to the number of shares owned within the company (Pride, Hughes & Kapoor 2013, p. 128). This means that those with a large number of shares their liability is high as compared to those with minimal shares in the company. The debts of the company also do not become personal burdens to owners of the company, but instead means that the company is solely responsible for them. In this business structure, transfer of ownership is possible in that a shareholder can offload shares for personal gain or as an attempt to raise more capital for the business (Pride, Hughes & Kapoor 2013, p. 119). On the contrary, setting up this business type requires various documents such as a Memorandum and Articles of Association while registering at Companies House. A private limited company can either be a family owned business or a fleet of companies, meaning that they tend to vary in size. b) Public limited company In business structure, there must be at least two directors and a company secretary that should be qualified enough to oversee the operations of the company. The difference between a private limited company and a public limited company is that shares of the latter can be bought by anyone at the stock exchange unlike in the former. This means that ownership is not closed and that anyone can own shares in the company as long as they are able to buy the shares being sold at the stock market. The paperwork in this business structure is quite immense and requires that the company file annual accounts and reports at the Companies House. 3. Factors to consider when starting a business One of the key factors that an entrepreneur should consider before starting a business is the availability of the capital that they require so as to finance the same (Gupta 2007, p. 50). Raising the initial capital might pose as a challenge and might influence whether a business should become a sole proprietorship, partnership, or corporation type of business. The entrepreneur should also consider their target market, which is essential in ascertaining whether the business would succeed or not. This can also be coupled with the business location, meaning that the business should be able to reach their target market with ease and they should be accessible in all the business structures (Gupta 2007, p. 54). Moreover, it is pertinent for entrepreneurs to ascertain the type of skills required in running their business before they begin to ensure that there is a smooth flow of activities. This helps in avoiding delays in the delivery of products and services due to the lack of the required people essential in facilitating this activity. This applies across all the business structures in that business owners should be comfortable enough as to surrender control of their businesses to professionals that are able to execute the day to day functions of a company effectively because of the skills they possess (Gupta 2007, p. 52). Depending on the line of business, the availability of raw materials required by the business is also another factor that should be considered before starting a business, as the firm should be established close to the raw materials in some instances. An entrepreneur also has to obtain information about the competition that exists in the market that they would to venture to ascertain the gap that exists and be able to fill it accordingly. However, when the product the business would launch to the market would enjoy a monopoly, then competition would not be a factor to consider because there would be none. As part of examining the competitors in the market, an entrepreneur should also consider the market strategy applied by their rivals and ascertain the factors that they need in order for the business to compete effectively within the market. Knowing the competitors by name and the market strategies that they use that can help a business to ascertain how effective to penetrate their target market and obtain market share. Therefore, competition should not be seen as a hurdle to a new business, but should serve as an opportunity to conquer the targeted market. Before setting up a business, an entrepreneur should factor in the laws and regulations that govern the establishment of their preferred businesses and determine whether they can be able to comply with the same. This means that a business might have to seek the services of lawyers to get interpretations of various laws and the consequences of failing to abide by them. In so doing, a business will be able to avoid hefty fines that might result from noncompliance or might lead to the closure of the business while still at its infant stage. Bibliography Gupta 2007, Business Studies Xi 6E, India, Noida, UP, Tata McGraw-Hill. Pride, W, Hughes, R & Kapoor, J 2013, Business, Boston, Cengage Learning. Read More