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Sole proprietorship - Essay Example

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John and Christine are looking forward to carry on their practice as tax agents.They have the sufficient capital required to carry on the business as tax agents.The business structures available to carry on business as tax agents are sole proprietorship, partnership, company and trust…
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Download file to see previous pages John and Christine are looking forward to carry on their practice as tax agents.They have the sufficient capital required to carry on the business as tax agents.The business structures available to carry on business as tax agents are sole proprietorship, partnership, company and trust. However, before selecting any structure for this business, the relative advantages and disadvantages of each are needed to be considered. FINDINGS: SOLE PROPRIETORSHIP: An entity where the person opening the business constitutes without any contract with others or incorporation of the entity. The person is solely responsible for all the debts and liabilities of the business. Advantages: It is the cheapest and easiest business structure. Sole proprietorship is under complete control of the person organizing it. Sole proprietor may retain and reinvest all the incomes of the business on its own motion. The payment of tax is easy and may flow directly to the tax return of the sole proprietor. The business may be dissolved easily. Disadvantages: The liability of sole proprietors is unlimited. So, the businesses as well as the personal assets of the sole proprietor are at risk. There are very limited sources available for the raising of funds as opposed to companies where fund raising is very high. PARTNERSHIP: An association/relationship of two or more persons to carry on a business for the purpose of earning profits is known as partnership. (Revised UPA, Section 101) Advantages: Partnerships are easier to establish as compared to companies. The two or more partners may increase funds more easily as compared to sole proprietorship. They may also have increased borrowing capacity. The pool of skills, knowledge and expertise is made wider due to the combination of more than one person. Partnerships also allow brainstorming which is more creative than the brainstorming carried out by sole proprietor. Disadvantages: Partners are liable for the actions of other partners as they act as agents for one another. The decisions between all partners are shared and this may cause disagreements which is the most drastic situation for a partnership. The liability of all the partners is unlimited.. However, this limitation may be overcome by constituting limited partnership. In limited partnership, the investments of the partners are liable for the debts of the firm and the partners’ personal assets are not liable. COMPANY: A company is a separate legal entity from its owners. So, the shareholders and members of the company are liable for the debts of the company only to the extent of their share/ interest in the company. The company which offers its shares to the general public for subscription is known as public company. The company which does not offer its shares to general public is known as private company. Advantages: The liability of the shareholders and/or members of the company are restricted to the value of shares purchased by him. The company is a separate legal entity i.e. separate from its members. Therefore, any suit against the company does not involve the members personally as opposed to partnerships where the partners are personally got involved in the suits. In private limited companies, the shareholders and directors of the company are usually same person keeping the ownership and management of the company in same hands. Disadvantages: The formation of company is costly as compared to partnerships and may require large amount of capital initially. Whereas, partnership and sole proprietorship does not require any such large amounts. The accounts of companies are complex in nature. Moreover, the statutory regulations and the company law of the country require the companies to follow the regulations regarding bookkeeping and certain types of accounts. The raising of funds and capital by the companies is also restricted to the authorized capital of the company. Moreover, in case of a private company, the increasing of capital is also usually restricted by the provisions of the company law of ...Download file to see next pagesRead More
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