The Advantages and Disadvantages of Individual Form of Business Organization - Coursework Example

The essence of the company is that it is a separate person in law. The partnership does not have legal personality. The partners are agents of the partnership. From this very basic difference between the company and the partnership flow many of the advantages and disadvantages of incorporation. Name Institution Introduction Limited companies can be understood simply as those organizations that individuals can set up to run their businesses1. However, the limited companies can be defined as forms of incorporation that has a limit on the liability that its shareholders can undertake. This implies that, the debts that the company may suffer are separate from those that the shareholders have. As such if the company undergoes a distress in finance, the property of its shareholders or their assets cannot be seized by the company’s creditors to settle the debts. Additionally, the ownership of these limited companies can be transferred through generations. Partnerships on the other hand refer to basically to associations of two or more individuals engaged in a business enterprise where the losses and profits are shared amongst them proportionally2. It implies to a business relationship where at least two individuals own as well as make decisions in the business. As such both individuals take liability for the debts or losses the business incurs. Additionally, it can be explained as a business with more than one owner. As such the owners serve as partners in the business. Therefore between these two forms of businesses organizations, there is an underlying difference that forms the core for their distinction. This is the legal personality where limited companies have their shareholders having a separate legal personality from the corporation while in a partnership the owners are liable. This essay therefore seeks to discuss the advantages and disadvantages of each individual form of business organization using the separate legal person as the main element of difference. Formation of a company Bajpai, (n.d) explains: Formation of a limited company involves the following: they are required first of all to be registered or incorporated with the companies house which requires an individual setting it up to establish a company name; company address; at least one director; shareholder(s), a memorandum of association which contains the agreement of the company shareholders; company shares details as well as attached rights normally referred as statement of capital; an article of association which provides the company rules regarding how it is to be run. All this when submitted and approved will enable the registration or incorporation of the company. This is authenticated by issuance of a certificate of incorporation. Formation of partnership A partnership is amongst the easiest business to form. There isn’t much of a legal requirement except for partners in the business preferring to sign a partnership agreement. This is more often referred to as the dead of partnership and involves the following: name of the prospective partners, the address of each of the partners, the responsibilities expected of each partner; shares of each partner; each individual partner’s right, and the duration the partnership is expected to last. Having had the above the partners will then register the partnerships and with the office of the secretary of state after which a business license as well as permits will be issued from the federal government, state and local government3. Differences in Raising Capital between partnerships and Limited companies Partnerships unlike limited companies have very limited avenues for raising capital. The ways through which partnerships raise their capital include the following: first, from the partners own contribution. This involves the partners contributing money from either their savings or earnings to raise capital for the partnership. Secondly, the partners can raise money through donations and grants. This may be from well wishers friends and family4. Thirdly, partnerships can raise money through loans from banks which can be provided based on their credit worthiness. Finally, the partnerships can also raise money through adding more partners or engaging dormant partners. On the other hand limited companies tend to have an advantage over partnerships in terms of how to raise capital. This is because first, they can borrow from financial institutions which include banks and other cooperatives5. Secondly, they can raise money through selling securities which then makes those who purchase them be a part of the shareholders of the company. Thirdly, they can borrow through bonds and debentures. Additionally, they can also raise money through investors who access their prospectus and stock performances6. The ability to transfer shares can further make it easier for a limited company to raise capital. This can be done through selling shares at a higher price based on how the company performs. Other differences between partnerships and limited companies The differences by far depict partnerships as more disadvantaged. Even though it is much easier to register a partnership as compared with registration process of a limited company, and tax filling is easier. The partnerships are more disadvantaged in other aspects as compared to limited companies. The partnerships are mostly risky because a business related act by one partner can legally binding for other partners. As such when an individual enters a partnership with an un-trusted person they may get themselves being held liable for some of the inappropriate actions of their partners with regard to the partnership. The personal liability of loses the partnership makes is yet another disadvantage. This coupled with liability for law suits is just too much burden. The ability to raise money for the partnerships is also limited. All these put together disadvantages the partnerships in comparison to limited companies that have separate legal person (AllBusiness, n.d). The law relating to business associations has implications for business and investors. According to Lloyd, Susan, Gates, Kapur, & Seabury, (2006), these laws have a restrictive nature which affects how business associations operate including the small business. These always have in some occasions made some business associations to suffer. These laws also serve to protect consumers from excessive exploitations as well. The business associations have been impacted in the following ways by these laws. The laws have lead to increase in tax rates of corporate, some have regulated the conduct of corporations or business associations impeding the business operation and denying the associations profitability7. They include the anti-trust laws which reduce the profitability of the business associations. This trend has led to business associations misstating their earnings in order to improve their stock market price. The immigration laws that regulate hiring of foreign workers sometimes have limited outsourcing of talents8. This has impacted on the growth of some business associations that would otherwise have had the right talent to grow their profits. As such some of the corporations have gone ahead to hire undocumented workers in attempts to ensure their performance is up to the set standards9. The federal trade commission on the other hand has been seen as a deterrent of business associations’ success by some corporations. This involves those business associations which engage in practices like price fixing and monopolies10. Additionally, the initial public offering that business associations could use to raise more capital and grow itself has been strictly regulated by the commission for Securities and Exchange (SEC). other include buying and selling of equities in the stock exchange that are under the oversight of this regulatory body mandated by the laws governing business associations11. Therefore some aspects of this laws that govern business associations are stringent and are deemed as anti-business by the associations that are affected. Governments and their laws even though sometimes they help to ensure the specific goals of this associations are met, should sometimes find a middle ground to ensure both parties are favored by the business laws. Corporate and security laws have an effect in the way investors will achieve their business goals. The business associations not left aside. In terms of liability exposure, corporate and security laws set the partnerships and other associations to liability risks especially when the law influences their ability to innovate and grow including beginning their operations. The changes that have been affected on the bankruptcy law as well make it hard for an individual to have a fresh start. This affects potential investors massively. The securities laws such as the Sarbox and other related acts also have an impact on the operations of the company in terms of trade of securities. There is yet to be consensus in the laws concerning the interests, growth trajectories and prospects of companies due to this law. Appropriate, reasoned solutions Some of the appropriate, reasoned solutions in this issue include the following. Laws that govern business associations should be geared towards promoting a healthy business environment where the associations can survive and have good growth trajectories. Additionally, with the advancement in technology and the increase in complexities of businesses more changes in the laws need to be adopted that to resolve the conflicts between the businesses and the spirit of the law. This can be done through increased participation in the formulation of such laws such that the goals of the business associations are not deeply compromised and a collaborative effort is engaged between the government and the business associations to enable mutual benefits12. Hybrid system: the limited liability partnership A limited liability partnership is indeed a new hybrid system that refers to a business organization where limited partners enjoy a limited personal liability as the general partners operate under unlimited personal liability. There is somewhat a similarity to the general limited company except for the existence of two classes of partners in this kind of business organization. As such the limited partners are not liable beyond their personal investment in the interest of the partnership. The limited partners therefore are not able to participate in the management and general decision making regarding the operations of the business. If they have to, then they have to change their membership to general partners13. In a limited partnership form of organization, the general partners can be either a corporation or an individual. Some occasions involve a silent partner in which case one partner finances the business while another takes part in the running of the business. As such, the limited partner will therefore be to protect the liability of the silent partner and their visibility. In addition they act as a conduit to pass operating losses and profits14. Limited partnerships in most jurisdictions are however required to have a written agreement unlike would be the case with the ordinary general partnerships. I some states this form of partnership is governed by the securities law which may make their legal costs even higher than that of corporations. This form of business can also have another difference with the general partnership in that, the limited partner may be subject to a special form of tax that can lead to offsetting certain advantages of tax shelter. This form of partnership is the latest entrant of business forms in the business associations and is seen to be more appealing as most peole tend to embrace this form of partnership. Conclusion In conclusion, as the essay sought to give the differences between the partnerships and limited companies, the paper has learned that: the limited companies can be defined as forms of incorporation that has a limit on the liability that its shareholders can undertake. As such if the company undergoes a distress in finance, the property of its shareholders or their assets cannot be seized by the company’s creditors to settle the debts. Additionally, the ownership of these limited companies can be transferred through generations. Partnerships on the other hand refer to basically to associations of two or more individuals engaged in a business enterprise where the losses and profits are shared amongst them proportionally. this implies to a business relationship where at least two individuals own as well as make decisions in the business. As such both individuals take liability for the debts or losses the business incurs. Additionally the paper has outlined various advantages that limited companies have over partnerships which stems from the liability aspect. They include separate legal entity of shareholders/ owners from that of the business which implies no attachment of an individual’s assets to offset a company’s debt among other explained benefits. Finally the essay has discussed in-depth the new hybrid limited partnerships and how it differs with the general partnerships. References Aaronson, S. A. (2011). Limited partnership: Business, government, civil society, and the public in the Extractive Industries Transparency Initiative (EITI). Public Administration and Development, 31(1), 50-63. AllBusiness. (n.d.). The Pros and Cons of Partnerships. Retrieved May 7, 2015, from allbusiness.com: http://www.allbusiness.com/the-pros-and-cons-of-partnerships-2-372-1.html Bajpai, P. (n.d.). investopedia.com. Retrieved May 7, 2015, from The Basics of Forming A Limited Liability Company (LLC): http://www.investopedia.com/articles/investing/091014/basics-forming-limited-liability-company-llc.asp Callison, J. W., & Sullivan, M. A. 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