Benefits and Disadvantages of Partnership Agreement - Assignment Example

Benefits and Disadvantages of Partnership Agreement INTRODUCTION Starting a new business require that it must have certain legal form in order to enforce its legal rights therefore it become necessary that at the time of forming any business, owners must be aware of about the possible legal forms of the business. Apart from deciding the legal form of business, next important step is the book keeping of the transactions which business undertake with its buyers, sellers , suppliers and various other business entities which transact with the business. However, what is critical and important is the difficulties which a new and start up business face especially when the owners and managers of the business are new in the line of business or have no experience of conducting the affairs of the business. This report will explore two most important legal forms which business may take in order to form them as a legal entity beside discussing the paper work required to prepare financial statements as well as concluding with the discussion of some of the problems new businesses may face during start up stage. THE LEGAL VEHICLES OF THE BUSINESS Business can be formed in many ways and can take many legal forms depending upon the prevalent legal environment in the country in which it operates. However, over the period of time, some standardized legal forms of have developed which are almost universal in all the countries in the world. These legal vehicles of the business include following 1) Sole Proprietorships. 2) Partnerships 3) Limited company A sole proprietorship is a business where there is only one owner and no stocks are issued and the owner of the business bears unlimited liability whereas in partnership is also more or less same like sole proprietorship except the fact there are more than two owners of the business. Limited companies are formed through issuance of the ownership rights in the form of stocks or share however the liability of the stockholders is limited to the extent of their shareholding in the company. Shareholders of the limited company are also exposed to double taxation. We will be exploring two legal vehicles of the business in our report discussing their advantages and disadvantages. Benefits and disadvantages of Partnership Agreement The most important benefit of forming a partnership is the fact that it is easy to form and operate without any much interference from the others as there are very few owners of the business. The owners and the partners are not separable from the business thus the business and the owners are not considered as two separate entities. Apart from the legal benefits of forming a partnership there are other benefits also like the sharing of responsibility, funding and expertise of available resources creates economies of scale for the firm to enjoy lower cost. Since partners are bound with the partnership deed therefore they can not leave the business otherwise the partnership will cease to exist. It therefore can be termed that this may hedge the interests of the other partners however potential disadvantage of this is the fact that it makes the life of partnership uncertain and it can not be claimed that the partnerships can work as going concern entities. The major disadvantages of the partnership include the unlimited liability of the partners virtually exposing their personal property to risk also in case of bankruptcy. Partnerships have limited scope due to their limited available capital and resources which restrict its flexibility besides allowing no transferability of shares.(Badam,2008). Benefits and disadvantages of Limited Company The most important benefit of incorporating as a limited company is the fact that the liability of the owners and shareholders of the company remain limited to the extent of their shareholding in the business. Further to this, by incorporating a limited liability company, the access to the large financial resources and professional management becomes easy which allow the company to undertake large scale production activities also. However the most important disadvantage of forming a limited company is the fact that it increases the agency cost for the company due to the conflict of interests between the owners and the managers of the company. Since the ownership and management of the company are different therefore the shareholders do not enjoy the same level of authority in making decisions as day to day affairs of the company. The Essential Records for Business The available accounting standards suggest that the requirement for keeping the essential records of the company for bookkeeping purposes depend upon the prevalent rules and regulations however there are some standards documents to maintain in order to prepare financial statements of the entity. It is very important therefore that firms must record its transactions properly and accurately. (Gupta, 2007). However what is most important for the company to maintain is to keep all the records where money has been spent and earned by the firm. The essential paperwork which the company must undertake is following: 1) Keep an up to date Cash Book 2) Keep the records of Income, Expenses and Balances. 3) Keep the track record of its Banking activities. 4) A daily record system with respect to the receipts and petty cash transactions. This can be achieved through maintaining a receipt book and a petty cash book.(www.etu.org,2008). These are some of the broad paperwork requirements for the firm apart from keeping the paperwork for other petty matters which do not recur so often. The Likely Start up Difficulties for the small firms Due to their size, small businesses often face the uphill task of gathering resources to start their business. The major area where they lack is the scarcity of money for these businesses. Since most of these businesses remain unregistered, privately owned, small in nature and lack the desired penetration in the market therefore the traditional sources of funding available to larger business like the bank funding, issuance of debt instruments etc are not easily available to them. Due to this problem they face acute shortage of essential resources necessary for starting up business. Apart from the non-availability of the finance to start the business, small businesses tend to have the inability to gather up the necessary human resource due to money constraints. Since, small business owners are mostly the person having the required skill level to initiate the business but due to their inability to start production at mass level, they tend to rely more on the external sources for their human resource needs. Thirdly, the existing legal as well as bureaucratic set up in countries like United Kingdom, the opening up of new business may require the completion of cumbersome formalities both at the legal as well as administrative level which often delays their venturing and creates substantial hurdles into the start up of the business. Recommendations Forming a partnership has its own benefits along with its own disadvantages whereas the formation of limited liability companies is prone to the risks also. Since the business is new and is a start up business therefore it would be better if the business is started as a limited liability company as it will provide more financial resources, greater flexibility, easy access to the various financial channels to obtain financing from the financial institutions. Besides incorporating as a limited liability company, the firm will be able to get a better exposure to the market as the listing of the company in the Security Exchange Commission would provide it necessary credibility. References 1. Nebraska Council on Economic Education. (2002). Lesson 6: Legal Forms of Business. Available: http://ecedweb.unomaha.edu/entrepreneur/lesson6.pdf.. Last accessed 02 April 2008. 2. Badam, Kanoj. (2008). Advantages of Partnerships. Available: http://www.indiahowto.com/advantages-partnerships.html. Last accessed 02 April 2008. 3. Gupta, Anil. (2007). Financial Accounting With Double Entry Bookkeeping - Traditional Methods of Financial Accounting.. Available: http://ezinearticles.com/?Financial-Accounting-With-Double-Entry-Bookkeeping---Traditional-Methods-of-Financial-Accounting&id=577597. Last accessed 03 April 2008. 4. http://www.etu.org.za. (2008). Basic Accounting. Available: http://www.etu.org.za/toolbox/docs/finances/webaccount.html. 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