Sole Proprietorships, Partnerships, and Sole Trade - Assignment Example

BUSINESS STRUCTURE By Students Name Course Professor University State Date Introduction Once a person decides to start a business venture it is crucial to decide on the legal business structure to choose. The type of business entity that a person chooses depends on numerous factors like taxation, record keeping and liability. However, the most important thing is to find the superlative fit for a business or organization. In addition, selecting the right type of a business structure, whether a sole proprietorship or a company aids in maximizing the chances of operational and financial success. It is notable that large entities like companies brings particular benefits in terms of liability protection and the complication required for a large business. Each business structure has its advantages and disadvantages and since every business has unique needs and goals it is important to do some research before making a choice. Jack and Jill as they plan to start a fitness canter they can chose from a variety of these structures. The following is an overview of the various types of business structures which comprises of; sole proprietorships, partnerships, and sole trade, joint venture and limited liability companies. Sole proprietorships A sole proprietorship is a business enterprise owned by one individual. This is the most common types of business structures. A sole proprietorship is easy to form, operate, has increased level of flexibility in terms of management, and it is also characterized by fewer legal and tax control. However, the owner of this form of business is fully liable for the debts that the business incurs However, a business owner is personally liable for all debts incurred by the business. This is a popular business structure because of its simple nature, nominal cost and easiness in its set up. A sole proprietor needs to register only his or her name and manage to get a local license and start a business. The owner of this form of business remains fully liable for all business debts (Contractor, & Lorange, eds., 2002). This implies that creditors can bring lawsuits against the business owners in case into runs into financial constraints. The contracts of a sole proprietorship are signed by the owner using his or her name because there is no separate entity under the law in respect to this business structure. Entirely everything about sole proprietorships is under the owner’s name, checks presented to the business, bank accounts among others. There is a need for the sole proprietors to observe formalities such as meetings and voting in association complex business forms. This form of business has a better chance to graduate into increasingly bigger and more complex businesses. Personally, sole proprietors are accountable for all debts of a sole business. That is, in case of a loan the sole proprietor is responsible for the total amount of the loan, which can hypothetically lead to loss of personal assets. Sole trade This is another suitable business structure which refers to a person trading individually and legally responsible for all issues related to the business. Some of these issues include, losses and debts that cannot be shared another party. It is a simple and comparatively economical business structure that one can easily start up. It is also important to note that the sole trade structure, the business owner makes all the decisions concerning starting and running the business. There are both advantages and disadvantages of this business structure. Some of the advantages are; it is easy and simple to start, the complete control of the assets remains in the hands of the owner, less reporting necessities, offsetting of losses against income and one is not considered as an employee in an own business, thus exempted to pay the payroll tax (Roberts, McNulty, & Stiles, 2005). There are also numerous disadvantages that are worth to note. The liability is unlimited which implies that the owners personal assets are at a risk in case something goes wrong. Another one is that there is limited chance for tax planning. Partnerships In this kind of business structure, there exists a relationship between two individuals who team up to undertake business. Start-up capital is contributed by all parties involved and other crucial aspects such as labour or skill, property. On the other hand, there is sharing of profits and losses as well. Unlike a sole trade, and sole proprietorship a partnership is expected to file yearly information return as a way of reporting their income gains, deductions, losses among others (Contractor, & Lorange, eds., 2002). However, this form of business does not pay wage charge, but rather goes through any caused benefit or misfortune to its accomplices. It is also notable that every partner includes a share of his or her partnership profit or loss in the tax return. In the legal context, there is a standard version of the Act that describes partnership as a distinct legal entity from its partners. This is different from the legal treatment of partnerships that existed earlier. In the case of tax treatment they do not pay income tax which is passed through the partner’s individual. The reason behind this is that partners are not seen as employees and they stand a better chance to receive increasingly favourable tax treatment compared to a case of a corporation where profits are taxed during the payment for dividends. Joint Venture This form of business structure or arrangement involves two or more parties who agree to team up and pool their resources for the aim of attaining a certain or specific goal. The task assumed by the parties can range from a novel project to other business activities. All the parties in a joint venture are fully responsible for losses, profits as well as cost linked to the business. Nevertheless, is its own particular entity, definite and independently from the members' different business advantages. The basis of a joint venture is on single business transaction context. This is a case where various individual companies agree to enter into joint ventures as a way of sharing strengths, minimization of risk and reduction of competition in the marketplace (Park, & Ungson, 1997). They can comprise of distinct business entities or a simply a collaboration among businesses. Joint ventures are started by parties coming into an agreement with stipulations of their shared goals and responsibilities. The contract is important because it makes sure that trouble is avoided and is specifically on the intentions as well as limitations. It contains same rights and duties as well, for instance, there is a shared right over the control of the enterprise, profits and losses suffered. It is important to note that termination of the joint venture can be triggered by certain aspects such as the end of a contract, upon completion of its purpose, the death of an active member or through a court order to terminate it (Killing, 2012). The major concern on joint ventures is that they have the capacity confine rivalry, particularly when they are framed by organizations that potential or new entrants. The other concern is on the entry restriction of other business in a certain market. Violations into these ventures are routinely evaluated by federal trade and other regulating bodies. Company A company refers to a unit that is involved in business. A company can be either a sole proprietorship, corporation or a partnership conditional to the type of the company that one is dealing with. This implies that it may be owned by a group or one person. The legal status of a company grants it similar rights as that of a normal person which implies that, it can incur debts and be sued or sue (Baysinger, Kosnik, and Turk, 1991). Owners of small businesses use company structures referred to as a restrictive limited company, that contains features such as ‘Pty and Ltd'. In addition, these companies do not sell shares to the general public and have restricted risk. On the other hand, large companies sell their shares to the general public and still manage to limit their accountability. Jack and Jill business structure These two parties have been working in environments that relates fully to what they intend to start, thus pooling together their resources will be very successful. Therefore, Jack and Jill stands a better chance to start a company business structure. There are numerous types of companies, but the most appropriate for Jack and Jill is a limited liability company. Limited Liability Company. This refers to a business association characterized by a corporation's liability shielded advantages, flexibility and tax pass through returns of a partnership. The limited liability company rose from desire from business owners to adopt a form of business structure that permits them to function as a traditional partnership. The main goal was on income distribution to the partners and protection from personal liability in respect of business debts as it is with corporate forms of business (Keatinge et al, 1992). Generally, this implies that unless an owner of a business starts a separate corporation, the owner takes up full liability for all business debts. However, under the limited liability company, the responsibility for the firm’s debts is not assumed by individuals on condition that they were not secured on personal grounds. There are a number advantages offered by limited liability company. One of them is in the classes of stock that this type of company can offer. Unlike other forms of business structure limited liability companies can offer numerous classes of stock with diverse right and they also have an unlimited number of corporations, individuals and partnerships that can take part as shareholders in the company. In the case of taxes, Limited Liability Company carries a number of advantages. For instance, in a limited partnership in case a partner role is not active his or her loses are classified as passive and cannot in any way be used as tax deductions to counterbalance active income (Keatinge et al, 1992). However, in a limited liability company, the company owners never assumes liability for the business' losses, and debt that are incurred by the company and which can be applied tax deductions alongside active income. It is also important for Jack and Jill to factor in aspects like transferability restriction. Apart from the benefits stated above restrictions on shares transfer is a critical issue with this type of company. In a limited liability company ownership interest are not transferable devoid of restriction. The Limited liability of shareholders is also a very important feature to note. In the capacity that shareholders are not liable for the debts of the company. The limitations of a shareholder may be affected if he or she is a director of the commercial and other laws practiced. Obligations and liabilities of directors The general statutory duties of directors in a limited liability company are set out in the companies Act of 2006.Some of the outlined duties are discussed below. A director is required to act within the powers or comply with the constitution of the company and in the decision making. Therefore, a director is supposed to exercise the powers only in line with the response provided. Directors are also expected to act in a manner that is in good faith with that of promoting the company success for the members’ benefits. In the process of undertaking this duty, a director should respect all crucial matters such as the possible consequence of his or her decisions, the employee’s interest; need to nurture the business of the company and the company’s desire to maintain a reputation. Exercising judgements that are independent and not to employees his or her power to others will. It is notable that this duty does not imply that a director should not rely on advice. Directors have a responsibility to ensure that they exercise reasonable, skills, care as well as diligence. This is all about being hard-working careful and conversant with the company’s affairs, for instance a director working as a finance yet he or she is a qualified accountant. The interests of the director and those of the company should not conflict. This is the duty of a director to ensure that such aspects are not experienced. Directors have a duty to make sure that they do not accept third party benefits and should also not show interest in proposed company arrangements. Director's liability Company’s debts, liability A liability alludes to obligations and financial debts of a company that are encountered during the process of its operations. On a balance sheet these aspects are recorded on the right side. They include accounts payable, loans, deferred revenues mortgages and accrued expenses. In a limited liability company, a director’s liability is based up to a certain limit. One, a director might be liable for the debts incurred up by a company up to a certain level that the company itself is not in a position or able to pay due debts. In cases a director breaches parts of his or her duties and a company suffers losses as he or she is liable to compensate for the losses (Keatinge, et al 1992). In addition, a director may also be subjected to a penalty on top of being held liable to pay debts on compensating for losses suffered. In specific cases a company holds property from a trust and a chief might be held obligated in a few positions for bringing about the liabilities of the trustee company. Director's liability may also be discussed from a guarantor context. Some of these instances occur where a commercial practice, trade creditor or any other party offering budgetary credit to a company may ask a director to give individual insurance over the organization's liabilities (Keatinge, et al 1992). These financial institutions may also ask for some form of security over personal interest as a way of securing the company performance of its obligations. Therefore, the director may lose the house in case the company fails to repay the loan. Directors as employees Jack and Jill may also be employees of the company in a status typically alluded to as the executive director. This type of director acts as the senior operations manager in the company. The day to day operations of a company falls under the responsibilities of an executive officer, which includes working together with the board and operating in line with the budget (Roberts, McNulty, and Stiles, 2005). In general the duties of directors go in line with those of an executive director; however, the executive director is destined by the employment contract. Working as executive directors Jack and Jill may assume duties such as staff management. The duty involves hiring, and motivating company employees (Roberts, McNulty, and Stiles, 2005). They may also assist in the development of management programs and policies that guides employees on how to fulfil their charitable purposes. It is the duty of an executive director to make sure that board remains updated on the company operations. They are also supposed to attend meetings while maintain open lines of communication with the board. Finally, these two groups work together to come up with a strategic plan that guides the company on the way forward. Conclusion The company business structure is the most favourable to the business idea that Jack and Jill intends to implement. As compared to all other business structures discussed in this paper a limited liability company will benefit them in terms of liability and the nature of taxation. They can also protect their personal assets through by incorporating a company. Another advantage of incorporating a company is on the income generation context that can attract a company tax rate. Reference List Baysinger, B.D., Kosnik, R.D. and Turk, T.A., 1991. Effects of board and ownership structure on corporate R&D strategy. Academy of Management journal, 34(1), pp.205-214. Contractor, F.J. and Lorange, P. eds., 2002. Cooperative strategies in international business: joint ventures and technology partnerships between firms (Vol. 2). Elsevier. Dess, G.G. and Robinson, R.B., 1984. Measuring organizational performance in the absence of objective measures: the case of the privately‐held firm and conglomerate business unit. Strategic management journal, 5(3), pp.265-273. Keatinge, R.R., Ribstein, L.E., Hamill, S.P., Gravelle, M.L. and Connaughton, S., 1992. The Limited Liability Company: A Study of the Emerging Entity.The Business Lawyer, pp.375-460. Keatinge, R.R., Ribstein, L.E., Hamill, S.P., Gravelle, M.L. and Connaughton, S., 1992. The Limited Liability Company: A Study of the Emerging Entity.The Business Lawyer, pp.375-460. Killing, P., 2012. Strategies for joint venture success (RLE international business) (Vol. 22). Routledge. Park, S.H. and Ungson, G.R., 1997. The effect of national culture, organizational complementarity, and economic motivation on joint venture dissolution. Academy of Management journal, 40(2), pp.279-307. Roberts, J., McNulty, T. and Stiles, P., 2005. Beyond agency conceptions of the work of the non‐executive director: Creating accountability in the boardroom. British Journal of Management, 16(s1), pp.S5-S26. Read More