Different Ways of Structuring a Business - Essay Example

Structuring Business Student’s Name: Course Code: Lecture’s Name: Date of Submission: Part 1 Introduction How entrepreneur (s) structures their business is critical depending as it has to take into context legal responsibilities, tax obligations, liability for debts and so on. Auckland Chamber of Commerce (2014, p.1) indicates that the most common legal business structures in New Zealand include sole proprietor/ trader, partnership and company. Additionally, there are other legal structures such as cooperative business organisations, joint ventures and syndicates (Pride, Hughes & Kapoor, 2012, p.124). The aim of this section is to explain the various ways of structuring business, their advantages, disadvantages and examples of such business structures. The discussion is limited to sole trader, partnership and company. Structuring Business Sole Trader Structuring business as a sole trader is within the context where an individual runs a business alone. In this regard, the person own manages and controls the business (Pride, Hughes & Kapoor, 2012, p.109). Example of such businesses in New Zealand includes individuals as technicians and professionals consultants plying their business as plumbers, doctors, electrician, architects and mechanics as individuals. However, this does not imply that they cannot employ other individuals as the obligation they have to do is register as employer with Inland Revenue (Ministry of Business, Innovation & Employment, 2014). The advantages associated with this structure rests on the fact that it constitutes the easiest approach into business as requires minimal cost to establish owing to the rationale that there are limited legal and formal requirements involved (Pride, Hughes & Kapoor, 2012, p.109). For instance, in New Zealand, what one requires to operate such businesses is personal IRD number and the appropriate licences and permits. Additionally, the other benefit is retention of all profits as the owner does not share with anyone after deducting operation cost. Equally, there are no special taxes that the owner is obliged to remit. For instance, in New Zealand the net profit is taxed at individual tax rate (Ministry of Business, Innovation & Employment, 2014). On the other hand, the greatest advantage arises out of the unlimited liability the owner of the business has. In this regard, the owner is personally liable to any debt arising out of the business. In a nutshell, the owner and business are not two independent legal entities. Additionally, raising of capital in such arrangements is not easy, especially from loans as he is responsible. Finally, continuity can be issue if the owner is deceased (Pride, Hughes & Kapoor, 2012, p.110). Partnership According to Partnership Act 1908 section 4 (1) “partnership is the relation which subsists between persons carrying on a business in common with a view of interest.” We can have general partnership which in New Zealand is governed by Partnership Act 1908 and limited partnership that is governed by Limited Partnership Act 2008. Limited partnership has at least one general partner and limited partner (section 8 of Limited Partnership Act 2008). An example of partnership business include professional organisations such law firms. There are numerous disadvantages associated with such kind of arrangements. The first is the liability of the partners. Under general partnership, section 12 of Partnership Act 1908 and Section 26 of Partnership Act 2008 indicates that everyone in the partnership is jointly liable for all debts and other obligations incurred by the business. This is extended to death where a partner’s estate is severally liable in settling of debts. Secondly, section 8 and 9 of Partnership Act 1908 states that partner has the power to bind the firm and partners are bound by acts on behalf of the firms so long as they are related to the purpose of the business. Finally, partners are collectively and individually liable to the actions of the other. Section 13 of Partnership Act 1908 and Section 27 of Partnership Act 2008 indicates that the firm liable as result of wrongs and acts of omission in the course of doing business. There are advantages associated with partnership. For instance, under limited partnership, Section 11 of the Limited Partnership Act 2008 indicates that ‘limited partnership is a separate legal person.’ Madura (2008, p.162-163) pinpoints some of the advantages associated with partnership structure. According to him, these include increased funding as each partner is expected to contribute a given percentage of start up capital. Secondly, the loss sharing is a blessing as it reduces burden in event that business bottom-line is negative. Company Companies Act 1993 section 10 (a-d) indicates that for a company/ corporation to exist, it has to have name, one or more share, one or more shareholders having limited or unlimited liability and one or more directors. Accompany can be categorised as private or public. Private company requires a minimum of one member while public companies are those that are listed in stock exchange markets involved (Pride, Hughes & Kapoor, 2012, p.119). One of the advantage associated with limited liability company the separation of legal entity since shareholders cannot be sued for the wrongs and acts of omission by the company because the two are separate legal entities. Companies Act 1993 section 15 states that “a company is a legal entity in its own right separate from its shareholders and continues in existence until it is removed from New Zealand register.” Other advantages associated with companies are the ease of raising money. For instance, public listed companies can do ‘initial public offer’ to raise the required money. Equally, transfer of ownership is comparative easier as compared to partnership and sole proprietorship. Finally, continuity of the business is guaranteed as this is a separate legal entity with management and board of directors even if one shareholder is deceased (Pride, Hughes & Kapoor, 2012, p.121). On the other hand, there are numerous disadvantages. For instance, there is the issue of double of taxation as compared to the other two structures. In this regard, corporations pay taxes based on profits and the shareholders are expected to remit taxes based on personal income as result of dividend accrued from the company. Other include stringent requirements, numerous paper works and reduced secrecy as issues are handled at board level with statements/ disclosures made public (Pride, Hughes & Kapoor, 2012, p.121). Conclusion The aim of the section was to establish the advantages and disadvantages of sole trader, partnership and companies. The paper established that in terms of protecting against liability for debts, it is difficult in partnership & sole trader while easy for company. In raising money, it is easy for partners & company while difficult for sole trader. In preserving continuity, it is easy in company and difficult in partnership & sole trade. In formation, it is easy for partnership and sole trader while difficult for company. Finally, in income taxation, it is twice for company shareholders while once for sole trader and partnership. Part 2: Reflection For me, the process of writing an essay is a nervous experience owing to the fact you are not sure if you will meet the expectations of the examiner. Equally, it involves critical thinking and research skills which are distinctively different from the day to day activities as issues have to be organised in logical order. However, I overcome this through discussion, review of past information and consultation. To write this essay, the first entry point was the review of past existing information on business structures. Secondly, I narrowed on New Zealand literatures. Equally, I consulted literatures on essay writing and structuring so that I could widen my scope on the issues under consideration, best approach and how to present the findings in a coherent manner. To avoid any room for confusion, I equally engaged my classmates before coming up with the final draft. As I did my final draft, the focus was to consult relevant literatures I had narrowed down on and the principal legislations govern business structures in New Zealand. At first, I had a nervous encounter because I was not sure if I will meet the exams and examiner expectations. This made me fear the whole encounter at the initial stages. However, I was able to counter this fear through wide literature search. The first point was the use of internet. After conducting the search, with the key word ‘business structures’ the results lifted my spirits as it presented familiar information. Henceforth, I developed a positive attitude towards the exercise as I was now wading through familiar concepts and the remaining bit was to refine them. Indeed, after overcoming the fear, I went a notch higher to localise my literature search to local context as I was heavily informed by legislations such as Company Act 1993, Partnership Act 1908 and Limited Partnership Act 2008. While there things I would do differently, first it is pragmatic to point out that exam experience is not an easy one even if one is prepared. However, in the second encounter, I will place adequate mechanisms so as to reduce the ‘fear of unknown’. My first point for paradigm change is to be positive in any test and realise that all test are derived from lessons learn and not outside context and the only reason for such is to test critical thinking, wide one’s perspective and refine individuals to be ready for the labour market. Secondly, I have to review diverse information as much as possible so as to enhance my grasp of the topic. Finally, I will up my note taking level so that it is easy to sieve through various points. References Auckland Chamber of Commerce (2014). Legal structures for small businesses. Retrieved on 27 July 2014 from: http://www.aucklandchamber.co.nz/Chamber/files/65/65082504-4582- 4cff-82af-4f9cd2bef848.pdf. Companies Act 1993. Limited Partnership Act 2008. Madura, J. (2007). Introduction to Business. Mason, OH: Thomson Higher Education. Ministry of Business, Innovation & Employment (2014). Business Structures: Focus on Sole Traders. Retrieved on 27 July 2014 from: http://www.business.govt.nz/starting-and- stopping/business-structures/focus-on-sole-traders. Partnership Act 1908. Pride, W., Hughes, R. & Kapoor, J. (2012). Business. Mason, OH: Cengage Learning. Read More