Essay on Sole Proprietorship, Partnership, and Incorporated Companies

• Sole Proprietorship

A sole proprietorship is a type of business entity that is run and owned by a single person, and there is no legal distinction between the enterprise and the owner. It can also be referred to as individual entrepreneurship or sole trade ship. There can be many people operating the work in this business, but the owner must be only one person. Examples of this business entity include those small works or organizations such as an artist, operating a local kiosk, freelancers, consultants, a local grocery store, and other small businesses owned by a single person. Below are the characteristics of a sole proprietorship, its advantages, and disadvantages.

Characteristics

The following are the characteristics that differentiate a sole proprietorship from other business entities: It has single ownership; sole proprietorship is owned wholly by a single person who funds the business in his way, either from his capital or loans. Secondly, the decision regarding the business is made by one person, the owner (Corporate Finance Institute). The owner cannot consult anybody; however, the owner can employ other peoples to assist him in doing various work. Third, the business is small in size; since the place of the business is limited, the scale of operation therefore becomes small.

In sole proprietorship business, there are no legal formalities needed when starting or dissolving the business and therefore, there is no legal entity. Therefore, the law have no any distinction regarding the owner and the business; if the owner becomes bankrupt or dies, that’s the end of the business and it is dissolved (Corporate Finance Institute). Sole proprietorship has unlimited liabilities; the owner of the business is personally held liable for the debts and loans the business may be having. Lastly, the entity does not allow profit-sharing; this is because the business is owned by one person and all the profit the business makes, they belong to him alone.

Advantages

Sole proprietorship has various advantages that the owner may enjoy over other types of business, the following are its advantages: it is easy and simple to start and run the business; this is because the process of starting sole proprietorship requires little paper work and few or no fees. Secondly, government regulations needed are few; different from other corporations, this business does not require resources like reporting financial information to the public (Corporate Finance Institute). Third, the owner get to enjoy the profit earned alone, proprietor does not share profit unlike other entities. Lastly, sole proprietorship less capital required and there is an advantage of tax; the tax is paid only once unlike other entities.

Disadvantages

Despite having a lot of enjoyments, sole proprietorship contain several limitations and disadvantages that the owner may experience. First, the entity has unlimited liability; because the business cannot have a separate legal entity, the owner have unlimited liabilities for all debts of the business. This means, if the entity fails to meet financial obligation, creditors can ask for the repayments and the owner may be needed to use their personal properties. Secondly, unlike partnership, the owner does not share loss with any person; they are fully liable for the loss that the business incurs. Lastly, sole proprietorship have limited size, it lacks continuity, and the capital is also limited.

• Partnership

A partnership is a business entity that involves two or more people who come together and start a business with an aim of getting the profits. According to Dr. John A. Shubin, it is a business where two or more person forms a partnership through an oral or written agreement that they will cooperatively accept full responsibility in conducting the business. The partners come into the agreement and they share the starting capital where they either share equally, or use some ratio. The minimum number of persons for partnership is two and the maximum is twenty. However, this business has various types of arrangements: General partnership; is a partnership where partners agrees in sharing all legal liabilities, assets, and profits. Limited partnership; it is a partnership where there are limited partners who are only liable up to their investment amount. Limited liability partnership; in this partnership, all partners carries on the business but their liabilities for one another’s deeds are limited. Limited liability limited partnership; this type gives all partners liabilities protection by limiting the general partner’s liabilities.

Characteristics

Just like other businesses, partnership has characteristics that distinguishes it from other business entities, they include: It is a contractual relationship; the partnership is formed only when there is a contract between two or more people/groups. According to Partnership Act, “The association of partnership appears from contract and not from status.” The contract can be done orally or can be written or both; an oral contract is adequate but it is normally finer to draft a partnership deed that specify every partner’s duty, their obligations, rights, and terms and conditions. Second, partnership has two or more people; for this business to exist, there must be a minimum of two person and a maximum of twenty.

Third, there is profit and loss sharing among the partners; the aim of partnership is to earn the profit. The profit earned during their business is divided amongst the as per their agreement, consequently, sometimes business may experience loss and as usual, they share the loss incurred. Fourth, unlimited liability; the liability of each partner is limited, therefore, creditors can recover their loans and debts from the partner’s private properties. Fourth, there is implied authority; each partner in the business can act as an agent where one can bind the other for the actions done by him on behalf of all partners like hiring and firing workers, sale and purchase of business products, borrowing money, and other acts. Lastly, there are restrictions of transfer of shares; no partner is allowed to transfer or sell their shares to anyone with intentions of making them partners. However, an addition or exist of one or more member leads to dissolution of the partnership.

Advantages

Being in a partnership business has the following benefits: In partnership, making decision is easy and robust since ideas concerning the decision are made by all partners. Partnership also saves individual money since every expenses and capital are shared amongst the members; therefore, more cash is raised and more saving is done. Unlike other business entities, partnership allow loss-sharing; this is an advantage since individuals will not feel the burden of the loss unlike being a sole proprietor. There is sharing of work and moral support since every partner is entitled to perform certain work in the business.

It is easy to start a partnership business since raising of funds is easy and the legal requirements and obligations are few. In partnership, there is access to knowledge thus leading to learning new skills and experience from other partners; by this, the business run smoothly since there is sharing of ideas. Compared to companies and cooperatives, partnership has more privacy; its affairs are confidential and they remain within the partners. Lastly, unlike sole proprietorship, partnership allow sharing of burdens where business is managed by more than one person; therefore, individual can have time for personal work.

Disadvantages

While partners may enjoy numerous advantages, just like any other business, it has several disadvantages. The business has unlimited liabilities; since it lacks separate legal entity, partners are all liable for business debts. Therefore, they can have trouble of losing their private properties to the creditors in case their business fails to pay off debts. Unlike sole proprietorship, individual cannot enjoy whole profits in partnership since the profit is shared amongst the partners. In a business with more than one person, potential conflict and differences may arise due to difference in views and strategic directions; this is because every partner wants to demonstrate their abilities. Lastly, in partnership there is limitation on business development, limited access to capital, it lacks independent legal status, and decision making process may be slower since it involves many people.

• Incorporated Companies

Incorporated companies, or corporations, are the separate legal entities from the person or people creating them; officers and directors buy shares in the business, and have control for their functioning’s. Incorporations therefore limit people’s liabilities in case of a lawsuit; directors do not have personal liabilities toward company’s debts. Incorporation means registering companies in registrar of company, hence, it assist the board of directors and management to perform risks that aid in the growth without affecting them.

Characteristics

They have limited liability; the liabilities of a share­holder and directors of an organization are limited. Shareholders are only liable to pay their own shares in the company but their private properties cannot be taken in compensation of the company debts.

Capital acquisition: It is easy for corporation to obtain equity and debt, because financial resources does not strain it. Therefore, new investors can be sold shares as well as bonds to bigger entities with an aim of financing debt.

Dividends: Dividends are issued to investors as a way of payment and this varies from that of other entities like partnership or sole businesses.

Double taxation: A corporation uses their earnings to pay income, it also pay income tax for the payment made to the investors through dividends; this therefore leads to the double taxation.

Life span: A corporation has a long lifespan since it is protected by law and it does not depend on the owner, however, owner can terminate it any time required.

Ownership: Corporations ownerships are determined by the total shares owned and they can be the ownership can be shifted through selling and buying of them.

Professional management: Those investors who directly own the company does not manage it, rather, they hire professionals to run the organization but report to them.

Separate entity: A corporation is whole separate in its operation and it is operated under the law; there are numerous rights and responsibilities of individuals.

Advantages

Incorporating offers liability protection where investors, shareholders, and directors cannot lose their private assets unlike sole proprietorship and partnerships. Also, individual and company taxes are separated; incorporating allows people to separate their personal taxes and therefore it may result to lower taxes. The third advantage of incorporated company’s income splitting opportunities occurs; by this, companies can pay their shareholders through dividends where shareholders must not be active in order to get them. Lastly, incorporating helps in succession planning where it gets to enjoy perpetual existence unlike partnership and sole proprietorship where the death of one partner or member leads to the dissolution of the business.

Disadvantages

Despite protecting its employees from liabilities, incorporating has several disadvantages; one of them is it is costly to initiate and run the business. Secondly, compared to other business entities, incorporating requires a lot of paper work and much time. During its establishment, the following legal documents need to be filled, Articles of Incorporation, non-disclosure agreements, certificates of good standing, company bylaws, and more. They are strictly governed by laws and regulations, and they are greatly monitored by the government. Another disadvantage that they experience is through double taxation where they end up paying more taxes unlike other businesses (Patria). Lastly, owners have no control over the business, those individuals from small shareholders lacks effective control over decision made in the company; they just follow decisions that have been made by management.

Work Cited

Corporate Finance Institute. “Sole Proprietorship – Definition, Advantages and Disadvantages.” Corporate Finance Institute, 2 July 2020, corporatefinanceinstitute.com/resources/knowledge/strategy/sole-proprietorship/.

Hearn, Edward Ned R. “Business Entities.” The Musician’s Business & Legal Guide. Routledge, 2017. 10-17.

Kiss, Lívia Benita. “The Importance of Business Partnership on the World Wide Web.” (2020).

Iossa, Elisabetta, and David Martimort. “The simple microeconomics of public‐private partnerships.” Journal of Public Economic Theory 17.1 (2015): 4-48.

Patria, Ayush. “Advantages and Disadvantages of Incorporation of Company.” Law Column, 27 Nov. 2020, www.lawcolumn.in/advantages-and-disadvantages-of-incorporation-of-company/.