Business Law: Advantages and Disadvantages of Sole Proprietorship - Essay Example

TASK ‘A’ Sole Proprietorship: It is also called one man show. It is a business owned by a single owner, also referred to as Sole Proprietor. A sole proprietor bears all the risks and losses and enjoys all the profits of the business. He is the only one to take decision. Advantages: Sole Proprietorship maintains secrecy. It does not require to share its business information with other whereas, in a corporation, financial statements and other business information are required to be issued to the stack holders, government, general public etc. Easy to be formed & dissolved. Owner doesn’t share the profit with anyone. Income Tax is imposed only once on the income of the sole proprietor because the profit of the organization & the owner is treated as one. Owner takes personal interest and offer maximum energy for the growth of his business. Unlike a corporation or partnership, a Sole Proprietor has limited or no legal constraint. A sole proprietor enjoys supreme decision making authority and control over the business because of his only ownership. Disadvantages: Sole proprietor is personally liable for any debt incase the business in not capable of paying back its debt. It is termed as Unlimited Liability. One owner can’t efficiently handle all management tasks at a single time. Deficiency of capital due to one owner. A sole proprietorship has limited life. It is dissolved if its owner dies, or become bankrupt, insane. Therefore, it has a limited life. General Partnership: It can also be called “Partnership”. It is an association of two or more people carrying on a business for profit. Maximum number of partner is 20 but in case of bank, it is only 10. There must be an agreement written or oral. As same as sole proprietorship, partnership has unlimited liability which means the partners are personally liable to pay off the debt if the business is not capable to do so. Advantages: As compared to a Sole Proprietorship, there are more owners to invest. More people to handle the management tasks. Tax is imposed once only on owner’s income. Disadvantages: It has unlimited liability. It has limited life. Admission or retirement, insolvency or bankruptcy, death or insanity of a partner dissolves the partnership. In such case, the partnership agreement is revised. Partners may contradict with each other in making decision which may cause clash between them. Limited Partnership: A limited partnership is one in which one ore more but not all partners have limited liability. There must be at least one general partner whose liability will be unlimited to pay all debts of the firm. This type of organization is best for funding a business. As per wiseGEEK.com, the limited partner generally has limited or no managerial authority. (wiseGEEK). To obtain a status of a limited partnership, the partners must get it registered with the registrar of partnership. It must also be kept in mind that a limited partner cannot withdraw any amount of his capital. If he does so, he will stay liable for the debts up to his original contribution of capital. Advantages: Unlike Sole Proprietorship, Partnership has more owners to invest. Moreover, capital can be increased anytime by increasing the number of partners. More people to handle the management tasks. It should be kept in mind that Limited Partners has no managerial authority. Tax is imposed once only on owner’s income. Partnership enjoys the highest credit standing. Creditors prefer to provide loan to partnership business because there is low risk of bad debts. Disadvantages: General partners have unlimited liability whereas Limited Partners have limited liability. It has limited life. Admission or retirement, insolvency or bankruptcy, death or insanity of a partner dissolves the partnership. In such case, the partnership agreement is revised. Partners may contradict with each other in making decision which may cause clash between them. C-Corporation: It is also called Traditional Corporation. A C-company is a legal form of business entity. Corporation is best for establishing a business on a large scale. It has no limit for number of shareholders even foreign citizens. It has limited liability which means shareholders are not personally liable to pay off company’s debt. Tax is imposed twice; first on the profit of the company and then on the dividends of the shareholders. In addition to this, corporation tax is paid regularly. A corporation may be a Public Limited or Private Limited. In Public Limited, shares are offered for sale to general public and have no limit to the maximum number of share holders. In Private Limited, shares are not sold to general public and the maximum number of shareholders is 50. Issuing prospect and obtaining commencement certificate are not necessary for a Public Limited but mandatory for Private Limited. The name of the company must be followed by the word ‘limited’. As a separate entity, a corporation can own property, make business deals, or even sue another business independently of the shareholders. Moreover, Corporation has transferable ownership. It is required for a C-Corporation to establish a board of directors and to hold annual meetings with shareholders. Management is run by the board of directors who are elected from among its numerous shareholders on the basis of their share holdings. Owners holding a majority of share, at least 51% of the total share capital, reach the board. “Corporations have neither bodies to be punished nor souls to be condemned. They, therefore, do as they like”, says Henry David Thoreau. Advantages: Liability is limited to the extent of owners’ investment. As being a separate entity, a corporation can sue and can be sued. It has long life as its management is separated from its owners. Transferable ownership Disadvantages: It is more difficult to create and maintain. It is the most formal form. Double taxation Formalities and regulations are required to be followed very closely. It is most formal form of business organization. S-Corporation: It is also known as S-Company. It is quite similar with the C-Corporation with some exceptions that the maximum number of shareholders must not exceed 75 and all of them must be U.S. citizens. An S-Corporation can issue only one class of stock certificate. On the other hand, a C-Corporation can issue different classes of stock. One basic difference between the two types of entities is that C-Corporation is taxed at both the corporate level and the shareholder level while S-Corporation is taxed only on shareholder level. In case of S-Corporation, Shareholders must be individuals or trusts—not other businesses. Major Advantages: Limited liability & single taxation. Minimize self-employment tax and FICA tax As compared to sole proprietorship or partnership, it is easier to raise capital for an S-Corporation while enjoying their two major advantages; limited liability and single taxation. Major Disadvantages: Limited number of shareholders & lengthy procedure for establishment Benefits such as health or accident insurance for employee shareholders (with at least a 2 percent partnership) may not be deducted by the corporation. (AllBusiness) No foreign shareholders acceptance Limited Liability Company: A business entity which is separate from its owners (members). Members have limited liabilities and tax is imposed once only on the profit of the members without the LLC entity being taxed separately. Moreover, there is no limit for the members in an LLC and its members can be individuals, corporations, or other LLCs. The members may manage the company themselves or hire personnel. The personnel are hired by the members and can also be fired by them. An article of Organization has to be prepared and submitted to the Secretary of State along with a filling fee. An operating agreement may also be prepared which governs the operation and management systems for LLC and mention how profits are to be distributed among members. The owner may appoint an attorney for preparing the operating agreement. Designation of a registered agent is necessary who is responsible for receiving any legal documents on behalf of the LLC. The registered agent may also be a member with the exception that the member must be located within the same state in which the LLC is established. Annual meetings are not required to be held. As compared to C-Company & S-Company, an LLC is easier and cheaper to establish. It is more flexible than a corporation and suited for single owner. Advantages: Limited liability & taxation may be single as per choice. Any member can participate in management & easy transfer of assets. Flexibility to make special allocations of distributional interests. (Spear) It can issue more than one kind of stocks Members can split profits and losses any way they wish. Major Disadvantages: As compared to S and C Corporation, an LLC has smaller life. Some states levy a franchise tax or capital values tax on LLCs. COMPARISON Liability Taxes Continuity Control Profit Retention Convenience 1. Sole Proprietorship Unlimited Liability. Therefore, credit standing is high. Imposed once on owner’s income. A sole proprietor is taxed on all profits of the business -- thats total income minus expenses. Limited Continuity. Life depends on the sole owner. A sole proprietorship is dissolved if its owner dies, become bankrupt or insane. Enjoys supreme decision making authority and control. Profit is not distributed. It is received by the only owner. Sole proprietorship is easy to be formed. No legal documentation is necessary at time of formation. A sole proprietor does not have to present any financial report but he has show its total profit and losses account to IRS for income tax. 2. General Partnership Unlimited Liability. It enjoys highest credit standing. Imposed once on partner’s income. Income received by the partners is taxed only. Limited life. Partnership is dissolved in case of a partner’s admission, retirement, death, insanity and bankruptcy. Control is divided among the partners as per agreement. The control is granted keeping in view the partner’s share in the business. Profit is divided among the partners as per their share capital or per agreement. There must be an agreement between the partners. It may be an oral or written agreement. Financial Statement or other documents are not required to be submitted. 3. Limited Partnership For General Partner(s), liability is unlimited but for limited partner(s), it is limited. Imposed once on partner’s income. Income received by the partners is taxed only. Same as General Partnership. Control is divided among the General Partners as per agreement. A limited partner has no or very little power to involve in management decisions. Same as General Partnership Same as General Partnership. 4. C-corporation It has Limited Liability i.e. the stakeholders liable for the debts of company to the extent of their invested amount. Tax is imposed twice; first on Company’s profit and then on the dividends of owners. It has long life because a corporation has its own legal entity i.e. the owners and the C-Corporation are not the same. Therefore, a C-Corporation is not affected by the death, insanity or bankruptcy of its owner(s). However, its continuity may be effected if all the stakeholders become bankrupt, insane, or dies at the same time Ownership is separated from the management. Shareholders elect a board of directors from among themselves who run the corporation with the help of hired specialized and skilled personnel. Dividends are usually distributed evenly according to the percentages of stock held by each stockholder. To form a C Corporation, you will need to register your business name, file a certificate of incorporation or articles of incorporation and pay a fee. Financial Statement and other necessary information are required to be published frequently. It is required for a C-Corporation to establish a board of directors and to hold annual meetings with shareholders. 5. S-corporation Limited liability. Single taxation. Tax is imposed only on share holders’ dividends. As same as C-Corporation, it has continuous life. Same as C-Corporation, management is separated from owners. Same as C-Corporation. Same as C-Corporation. 6. Limited Liability Company Limited liability. Single taxation. As same as C & S Corporation, an LLC has uninterrupted life. Same as C & S Corporation, an LLC’s management is separated from its owners. Members can split profits and losses any way they wish. The LLCs operating agreement determines how the LLC is managed. As such, the owner may restrict the power to himself only. TASK ‘B’ MEMORANDUM The owner is advised to choose Limited Liability Company. An LLC is a special kind of business organization. Darrell Zahorsky says, “It is a type of business ownership combining several features of corporation and partnership structures” (Zahorsky). The owner may chose single owner LLC or multi owner LLC but as per the requirements of the owner, it is advisable to choose single owner LLC in which taxation is charged in same style as in Sole Proprietorship. It is a business entity which is totally separate from its owner. It means that if the business cannot fulfill its debts, then the owners are responsible for the debts only to the extent of their investment. They are not personally liable to pay off the debt. It means that the owner now needs no insurance for his business. Moreover, a separate legal entity means that an LLC can sue and can be sued. So if an installer were to make an installation error and a cabinet were to fall off the wall and injure someone or a delivery truck involve in an accident or a worker injure himself then the members would not be personally responsible. Owner wants to expand its business geographically and by adding a second factory in an adjoining state. Since there is no limit on the number of shareholders in an LLC, its capital can be increased anytime by issuing shares. On the other hand, in an S-Corporation the maximum number of owner is 75. Adding a second factory in an adjoining state will need to pay a qualification fee and the owner has to appoint a registered agent in that state to become fully legal. The fees is not much high. An LLC saves huge amount of taxes. Tax is imposed once on dividends of the shareholders. In case of C-Corporation, there is double taxation. Members will be required to make quarterly payments of their estimated tax liability, to both the state and to the federal government. Unlike S-Corporation, an LLC can issue different kind of stock. For LLC, it is not mandatory to hold annual meetings or prepare annual reports which would save the owner from immense headaches while C & S Corporation are required to hold annual meetings and prepare annual reports. Due to the above given reasons, LLC is the most appropriate option for the owner keeping in mind his worries and requirements. Works Cited (n.d.). Retrieved from wiseGEEK: http://www.wisegeek.com/what-is-a-limited-partnership.htm AllBusiness. (n.d.). (D&B Company) Retrieved from http://www.allbusiness.com/business-planning/business-structures-corporations/2516-1.html Spear, S. (n.d.). Retrieved from LLRX.com: http://www.llrx.com/features/llc.htm Zahorsky, D. (n.d.). Retrieved from About.com: http://sbinformation.about.com/cs/ownership1/a/LLC.htm Read More