Sole Proprietorship Definition - Assignment Example

SOLE PROPRIETORSHIP In a sole proprietorship, it is the owner who starts the business. He or she is the one who takes full responsibilities of all the actions and operations of the business, both long term and day to day activities. A sole owner of the business in that sense enjoys both added advantages as well as added responsibilities. In his business all the liabilities that he takes up are of his own which means that business liabilities are the same as the owner’s liabilities, which is why when an entrepreneur starts his or her first motivation to turn the business into a corporation is the liabilities and the transferability of those liabilities onto the business. The advantage of having a sole proprietorship is that all the earnings and profits of the business belong solely to the owner. He or she does not have to appropriate or share his profits unlike in the case of partnership or a corporation. However, the owner also bears the losses that the business makes and if have to sell his personal assets to pay them off. The cost of starting up a sole proprietorship is very low. It is in fact the least expensive mode of business to start. The only cost that the owner incurs is the cost of filing for a business or a trade name. Sole proprietorship is not perpetual. This means that with the demise of the owner, the business ceases to exist as well. Death dissolves the business. In this case if the owner wishes to pass on the business to a relative, he or she may conduct succession planning so that the family member can smoothly takeover the business. The owner also has the complete freedom to sell or transfer any or every part of his business to whomever he or she wishes too. There are no restrictions in a sole proprietorship as in the case of partnership where on might need a formal permission before selling or transferring. When it comes to raising funds, the owner can only raise funds through personal investment or loans that he or she might take from friends and family members. The ability of the entrepreneur to raise capital depends largely on the success of the business and the personal capability of the owner. Banks can also give loans but the procedure isn’t as easy as it is too risky of an investment for a bank and a thorough risk assessment may be conducted to check the credit worthiness. Should the need arise to borrow form a bank; the entrepreneur might need a collateral to support the loan. It is all the more difficult for a woman entrepreneur to raise funds through banks and she often can only rely on her personal funds and loans from friends and family. In a proprietorship, all the major decisions are made by the entrepreneur and these decisions can be made be made quickly as there are no layers of management involved. The entrepreneur enjoys greater flexibility in decision making than any other modes of businesses. For proprietorship, the IRS treats the individual and the business as one; therefore all the income earned by the business is taxed as personal income. The business is not considered as a separate entity when it comes to taxation. This has an effect on the taxable yea, capital gains and losses, distribution of profits and medical benefits. PARTNERSHIP In a partnership there may be more than one owner some comprising general partners while some limited partnership owners. There are also partners who belong to limited liability partnerships. In a partnership, there are no limitations on the number os partners a business can have. The liability of owners in a partnership is different form sole proprietorship. The general partners of the business usually share the amount liable equally, regardless of how much capital each one of them has contributed to the partnership, unless there is a formal and specific agreement that states otherwise. The protection that each of these partners can receive against the liability suits that might occur is the insurance or partners putting up their assets in each other’s names however the government might have an issue against the latter option if it feels that it is done only to commit fraud against the businesses’ competitors. In a partnership, there are limited partners as well. These partners are only liable for the amount of capital that they have contributed to the partnership. Their amount should be registered at the local courthouse and then made public. The limited liability partnership is common in firms such as law and CPA firms. The cost of starting a partnership is slightly more expensive than starting a proprietorship. The costs include filing a trade name and a partnership agreement. The agreement should cover all clauses and to ensure clarity experts should be hired to give advice on legal matters. The continuity of a partnership is determined by the nature of the partnership. In a general partnership if a partner dies or decides to leave the business, that results in termination of partnership unless the partnership deeds says otherwise. If it is a limited liability partnership, death or withdrawal has no effect on the partnership and the business continues to operate with the remaining partner with the partner being replaced like any other employee in a company. In partnerships, the transferability of interest again depends on the type of partnership. General partners cannot usually sell their shares without first refusal from the remaining partners. Limited partners in a general partnership can sell their interest without any prior approval however, in an LLP, Transfer of interest of one partner is not allowable as these entities are based on people holding intellectual property therefore it can lead to problems. In a partnership capital is raised initially by each partners own share. Banks could also be approached to raise further capital also, partners could add additional capital of their own should the need arise. Limited partners can also be used. The attractiveness of raising capital is determined by the success of the business and the personal traits of each partner. In such firms, management control can cause problems if the partnership agreement does not clearly indicate the roles and responsibilities of each partner. In a partnership, the majority rule. It is advisable that the partners be sensitive to each others thought and opinions and make sound and reasonable decisions. Limited partners do not have any management control. Distribution of profit and loss in a partnership again depends on the partnership agreement; usually it is on the basis of the amount of capital each partner has contributed. Limited partners are protected from liabilities that go beyond their contribution of capital. The tax benefits of a partnership are as same a sole proprietorship. The business and individuals are treated as one regarding the matters of gains, losses, dividends, bonuses etc. Limited partners again are protected form excessive losses and receive their share of profit as personal income. REFERENCE 1. Hirsch, R, Peters, M & Shepherd, D 1997, Entrepreneurship 7th edition, Indiana CORPORATION In a corporation, the ownership is determined by ownership of shares of stock. There are two kinds of corporations that exist not. In a general corporation, there is no limit to the no of shareholders who may own the stock of the corporation. However, in an S corporation, the number of shareholders cannot exceed one hundred. When it comes to the liability of owners, a corporation is the most attractive form of business as the business or the company is treated as a separate legal entity that is taxable and absorbs all the liabilities. The owners that are the shareholders are liable for their own share of investment only. The cost of starting a corporation is the highest as a corporation can be created only through a statute. This means that prior to the formation of the corporation and prior to its becoming a legal entity; the owners of the corporation are required to do two things. 1. Register the company name and the articles of corporation such as AOA and MOA. 2. Meet with the statutory requirements which might incur them costs such as filing fees, organization tax and separate fee for conducting business in different states. They might also incur the cost of hiring an expert for legal advice. The corporation has a perpetual life. It has the most of continuity out of all forms of business. Usually when a shareholder dies the corporation charter requires the remaining shareholders to purchase the shares. This issue only arises in small private companies where there aren’t many shareholders. In a public corporation this is not an issue as stocks are traded publicly. Transferability of interest in a corporation differs from sole proprietorship and partnership as this kind of a business has the most flexibility when one wants to sell or transfers one’s interest. The shareholder does not need prior consent or approval for selling his or her shares of the corporation. There is a disadvantage of this freedom though. The freedom of transferring interest can’t affect the ownership control of a corporation when election for BOD is taking place. It can also lead to dilution of ownership. There are several options available to corporation than other forms of business when it comes to raising capital. The opportunities and the likeliness of raising further capita is the greatest in a corporation. Further stocks, voting or non-voting can be sold. Non voting stocks issued, protect the ownership control of the existing shareholders. The company can also raise funds through bonds that pay out fixed amount of interest rate, this mode however, is slightly more difficult as the company needs to be in a strong financial position to be able to raise funds through bonds. There is also another option available to corporations and that is to raise loans in the name of the company. This mode protects the personal liability of the entrepreneur. Corporations are usually the most attractive forms of business to raise capital due to their advantage regarding personal liability. The more successful the organization ism the easier it is to raise capital. In a corporation, management control differs drastically from a partnership or sole ownership of business. Day to day activities are managed by the management who may or not may not be owners or shareholders. Decisions that affect the organization in the long term are determined by the major stockholders through voting. Thus in a corporation, Ownership is separate from the management. The Stakeholder theory applies to the corporation the most. There can also be indirect control of BOD decisions if the stockholders elect someone who can voice their views on major business decisions. As the company grows larger the separation of ownership and management becomes more clearly defined. Corporations distribute their profits in the form of dividends to their shareholders but only when they have met other obligations such as paying of debtors and preference stock holders. It is not necessary that the corporation distributes all profits. It can retain some for future funding requirements. If the year results in losses there is a chance that dividends might not be paid. Since a corporation is treated as a separate entity by the IRS, it has the advantage of making several and expenses that are not available to other forms of businesses. However, the disadvantage is that al incomes and profits are double taxed. First, as the corporation income then taxed as personal income. If the profits are distributed as bonuses and salaries and incentives, that income is only taxed as personal income. Another advantage is that corporate tax rate is lower than individual rate. Read More