Advantages of a Sole Proprietorship

Advantages of a Sole Proprietorship

A sole proprietor has complete control and decision-making power over the business. Sale or transfer can take place at the discretion of the sole proprietor.  No corporate tax payments Minimal legal costs to forming a sole proprietorship Few formal business reuirements Disadvantages of a Sole Proprietorship

!he sole proprietor of the business can be b e held personally liable for the debts and obligations of the  business. Additionally" Additionally" this risk extends to any liabilities incurred incurred as a result of acts committed by employees of the company. All responsibilities and business decisions fall on the shoulders of the sole proprietor. #nvestors won$t usually invest in sole proprietorships. Advantages of Partnership •

 %ue to the nature of the business" the partners will fund the business with start Capital –  %ue up capital. !his means that the more partners there are" the more money they can put into the business" which will allow better flexibility and more potential for growth. #t also means more potential profit" which will be eually shared between the partners.

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Flexibility –  A  A partnership is generally easier to form" manage and run. !hey are less

strictly regulated than companies" in terms of the laws governing the formation and  because the partners have the only say in the way the business is run &without interference by shareholders' they are far more flexible in terms of management" as long as all the partners can agree. •

 (artners can share the responsibility of the running of the Shared Responsibility –  (artners  business. !his will allow allow them to make the most of their abilities. )ather than splitting splitting the management and taking an eual share of each business task" they might well split the work according to their skills. So if one partner is good with figures" they might deal with the book keeping and accounts" while the other partner might have a flare for sales and therefore be the main sales person for the business.

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Decision Making –  (artners  (artners share the decision making and can help each other out when

they need to. More partners p artners means more brains that can be picked for business ideas and for the solving of problems that the business encounters. Disadvantages of Partnership •

Disagreements –  *ne  *ne of the most obvious disadvantages d isadvantages of partnership is the danger of

disagreements between the partners. *bviously people are likely to have different ideas

on how the business should be run" who should be doing what and what the best interests of the business are. !his can lead to disagreements and disputes which might not only harm the business" but also the relationship of those involved. !his is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved. •

Agreement –  +ecause the partnership is ,ointly run" it is nec essary that all the partners

agree with things that are being done. !his means that in some circumstances there are less freedoms with regards to the management of the business. specially compared to sole traders. owever" there is still more flexibility than with limited companies where the directors must bow to the will of the members &shareholders'. •

iability –  *rdinary (artnerships are sub,ect to unlimited liability" which means that

each of the partners shares the liability and financial risks of the business. /hich can be off putting for some people. !his can be countered by the formation of a limited liability  partnership" which benefits from the advantages of limited liability granted to limited companies" while still taking advantage of the flexibility of the partnership model. •

!axation –  *ne of the ma,or disadvantages of partnership" taxation laws mean that

 partners must pay tax in the same way as sole traders" each submitting a Self Assessmenttax return each year. !hey are also reuired to register as self employed with M )evenue 0 1ustoms. !he current laws mean that if the partnership &and the partners'  bring in more than a certain level" then they are sub,ect to greater levels of personal taxation than they would be in a limited company. !his means that in most cases setting up a limited company would be more beneficial as the taxation laws are more favourable &see our article on the Advantages and %isadvantages of a 2imited 1ompany'. •

Profit Sharing –  (artners share the profits eually. !his can lead to inconsistency where

one or more partners aren3t putting a fair share of effort into the running or management of the business" but still reaping the rewards !he popularity of corporations is due to following advantages4 1.

!he liability of the owners towards the creditors is limited to their investment in the company. !his means that in case of liuidation of the company" if the company$s assets are insufficient to meet the liability" nothing is reuired to be contributed by the owners. *nly the owners$ contribution is at stake rather than their personal assets. 2. !he corporation is considered a legal person with perpetual existence. #t exists until it is liuidated and death or change in ownership has no effect on the corporation. 3. Additional capital can be raised easily through stock markets" etc.

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!he ownership is represented by the number of share certificates held by a person" and this makes the transfer of ownership very easy.

Following are the disadvantages of a coporation4 1.

stablishing a corporation is a complex process and reuires registration with the central regulatory authority and listing on a stock ex change which reuired fulfillment of certain reuirements related to the amount of capital" number of directors" etc. 2.  Normally the corporations have a large number of shareholders5 they delegate the governance function to a body of persons called board of directors. !he board of directors hires management to look after the day to day affairs of the corporation. !he management is an agent and the owners are principal. #t is uite possible that the management may act to further  their own interests rather than the interest of the owners of the corporation. /hen this happens it is called an agency problem. 3. #n case of corporations there is double taxation. First of all the corporate income is taxed at a flat rate and then the dividends paid to the shareholders is taxed. /hat is a $6oint Stock 1ompany$ A ,oint stock company is an organi7ation that falls between the definitions of a partnership and corporation in terms of shareholder liability. #n the 8nited States" shareholders of ,oint stock companies have unlimited liability for company debts" but in the 8nited 9ingdom" shareholder liability is limited to the nominal value of shares held by each shareholder.

What is a 'Joint Venture - JV' A ,oint venture &6:' is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. !his task can be a new pro,ect or any other business activity. #n a ,oint venture &6:'" e ach of the participants is responsible for profits" losses and costs associated with it. owever" the venture is its own entity" separate and apart from the participants$ other business interests.

Business Trust  An unincorporated business organization created by a legal document, a declaration of trust, an d used in place of acorporation or partnership for the transaction of various kinds of business wi th limited liability. !he use of a business trust" also called a Massachusetts trust or a common-law trust" originated y ears ago to circumventrestrictions imposed upon corporate acuisition and development of real e state while achieving the limited liability aspect ofa co rporation. A business trust differs from a c orporation in that it does not receive a charter from the state giving it legalrecognition5 it derives its status from the voluntary action of the individuals who form it. #ts use has been expanded toin clude the purchase of Sec"rities and commodities.