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 can be referred to as one of the simplest and most popular form of business. 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 a fictitious 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 (Spadaccini, 2007). Sole proprietorship has no separate entity 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 (Spadaccini, 2007): 1. It’s an easy and inexpensive form of business. 2. It carries very few formalities. 3. There is no need for payment of employment tax. 4. “Owners may freely mix business and personal assets” (Spadaccini, 2007, p.5). Disadvantages of sole proprietorship include (Spadaccini, 2007): 1. Personal liabilities for debts, losses, and other business liabilities are unlimited. 2. Capital cannot be raised by selling interests. 3. There is rarely any continuity after owner’s death. Sole proprietorship can either be terminated by contract or if the owner dies. “If the proprietor sells the business, quits, or dies, the business ceases to exist” (“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 form the business (Clifford and Warner, 1981). According to Medina, “partnerships may be classified in three ways; (1) as to object, (2) as to liability, and (3) as to period of existence” (1988, p.32). Partners in a partnership type of business can be classified 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 this 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.). Advantages of a partnership include: 1. It is easy and inexpensive for partners to start. 2. Only a few formalities are required and not annual general meetings. 3. For smaller businesses, partnerships get favorable taxation. 4. Minimum taxes required for corporations and limited liability companies are not charged in the case of a partnership. Disadvantages of Partnership include: 1. Except in cases of limited partnerships and liabilities, partners are a subject to unlimited personal liability. 2. “Individual partners bear responsibility for the actions of other partners” (Spadaccini, 2007, p.6). 3. Disputes are common in partnership. 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. Differences between sole proprietorship and partnership include: 1. The profit and loss account. In partnership, the net profit is divided equally among partners and this division is done through profit appropriation account (Denny, 2003). The profits will be shared accordance to a formula agreed among them. In sole proprietorship, the profits and loss account is a statement of retained profits. The proprietor has the power to withdraw money, so as to meet his personal needs, and at the end of the year a statement is drawn and it indicates the amount of profit left in the business. 2. Membership. Sole proprietorship is a business owned and dominated by one person, while in partnership, the business is owned by more than two people who are referred to as partners, (Das, 2012). 3. Agreement. In partnership, an agreement is necessary; this agreement can be expressed or implied. In a sole proprietorship, there is no need for an agreement in any formalities to start the business. 4. Registration. In sole proprietorship there is no need for registration, but in a partnership there is need for registration, this registration has advantages (Das, 2012). 5. Management. 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 the risks the business gets. 7. Capital. In partnership, all partners contribute capital formation. 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. On the other hand, in partnership, 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. Similarities between sole proprietorship and partnership include: 1. Freedom from Government regulation. Sole proprietorship and partnership types of businesses are free from government control. 2. Duration of business venture. Sole proprietorship and partnership are both easy to form and terminate. 3. Financial requirements for starting and expanding business. 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 is a type of business owned by a single person, while partnership is a form of business that is formed by two or more people. However, in both types of businesses, the aim is to make profits. The ways in which both businesses are formed and the way they operate are different. Nevertheless, there are a number of similarities between the businesses. References 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 Clifford, D. & Warner, E. R. (1981). Form a Partnership: The Complete Legal Guide Ralph E. Warner (9th ed.). Berkeley: Nolo. Das, B. (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, R. (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, R. (1988). Business Finance. Quezon City: Rex printing company, Inc. Spadaccini, M. (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