Types of Business Ownership, Sole Proprietorship and Partnership

A business that is carried on by a sole proprietorship is owned by one person, who also usually runs and manages the business. There may or may not be people working in the business these are referred to as employees of the business and the owner is the employer.

The sole proprietorship receives all profits and is legally required to bear and satisfy all losses personally. The sole proprietorship is personally liable for debts of the business. So that, the sole proprietorship has unlimited liability to repay amounts owing, or debts, of the business. For example, if the business incurs debts resulting from a warranty claim, then the individual will be held responsible for those debts, and any claims will be made against the individual’s personal assets. As well, sole proprietorships are taxed under the personal tax system.

The sole proprietorship it is easy to set up and may only require registration of the business name and is free to run the business as he or she thinks best and is not answerable to a boss. As for the name of the business, the name of the owner or any other name may be used. Normally, a sole proprietorship business requires a small amount of capital to start with, compared with other forms of business entities. Examples of sole proprietorship businesses are tailor shops, beauty saloons, restaurants, launderettes and mini market.

Partnership is an association of two or more persons or entities that carry on business as partners. The partners usually run and manage the business. However, there may be a silent partner who does not take any part in the running of the business even though they have contributed capital to the partnership. In a partnership, each partner is personally liable for all debts incurred by the business; in the event of the firm’s failure, each partner’s personal assets are jeopardized.

In the partnership, the partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed.

There are two basics forms of partnerships, general and limited. In a general partnership, all partners have unlimited liability, while in a limited partnership, at least one partner has liability limited only to his or her investment while at least one other partner has full liability. Examples of partnership are law or accounting firms, medical or dental practices

In partnership that are many kind of partner, for example:

Ostensible Partner: Active and known as a partner.

Secret Partner: Active but not known or held out as a partner.

Dormant Partner: Inactive and not known or held out as a partner.

Silent Partner: Inactive (but may be known to be a partner)

Nominal Partner: Not a true partner in any sense, not being a party to the partnership agreement. However, a nominal partner holds him or herself out as a partner, or permits others to make such representation by the use of his/her name or otherwise

A company is a separate legal entity formed under the Corporations Act 2001.Commonly, its owners are called shareholders and their ownership interests are represented by shares in the company. The separate legal status of the company has many implications for the entity. First, the company can enter into contracts, incur debts and pay taxes independently of its owners. The owners pay individual taxes only on the company profit paid out to them in the form of salaries, bonuses and dividends.

The shareholders are not liable for the company’s debts once the shares they hold have been paid for in full. For example, if a company issued $1 shares, with 60 cents payable on application and the remaining 40 cents payable by future installments, the shareholders’ liability in the event of the company collapsing would be remaining 40 cents on each share they own. This feature is known as limited liability; that is, their obligation is limited to the amount, if any, unpaid on their shares.

As a separate legal entity, a company has many of the rights, duties and responsibilities of a natural person. It can, through its agents, buy, own and sell property in its own name and engage in business activities by entering into contracts with others. It has legal status in a court and can sue and be sued, is legally responsible for its liabilities, and must pay income tax just as a natural person does.

Different type of business ownership has different type of characteristics, what is the different between each other? The major different characteristics of each other are tax consideration, liability, duration, ease and cost of set up.

Tax Considerations

The sole proprietorship any income to the business is treated as income to the business owner and all income is reported on individual tax return, and is taxed in the year it is received. Business deductions are permitted. While in partnership, a Partnership Agreement can allocate the profits or losses in any ratio agreed to between the partners but if there is no Agreement, the profits must be allocated equally. Business deductions are taken by the partnership before the income is distributed to the partners and claimed on their personal tax returns. The profit of a company is taxed to the company when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

Liability

In Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk. In Partnership, partners are liable for all the debts of the business and the full amount of these debts can be collected from one or more of the partners rather than the debt being equally shared. Partners can also be held liable for acts committed by one of their partners in the normal course of business. Owners of a Company have the liability protection of a corporation. That is because, the company exists as a separate entity much like a corporation. A company member cannot be held personally liable for debts unless they have signed a personal guarantee.

Ownership interests

Ownership interests in a company may be sold to third parties without disturbing the continued operation of the business. A sole proprietorship or partnership, on the other hand, cannot be sold whole

Duration

The sole proprietorship remains in existence for as long as the owner is willing or able to stay in business. When the owner dies, the sole proprietorship no longer exists. The assets and liabilities of the business become part of the owner’s estate. A sole proprietor can freely transfer a business by selling all or a portion of the assets of the business. In partnership the business organization ends with death, incapacity, withdrawal or bankruptcy of any partner, unless otherwise agreed to in a Partnership Agreement. In company form a continuity of life, it has the power to exist forever and, therefore, is unaffected by the death of an owner or manager or by the transfer of ownership interests.

Ease and cost of set up

The sole proprietorship and partnership it is easy to set up and may register a trade name to promote its products and services. While in company, a company must be registered with the Registrar of Companies. Company cost more to set up and run than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. However, these costs are partially offset by lower insurance costs.

Flexibility

Beside that, a partnership may be relatively more flexible in the decision making process than in a corporation. But, it may be less so than in a sole proprietorship. That is because sole proprietorship management is able to respond quickly to business needs in the form of day to day management decisions as governed by various laws and good sense.

Raising Capital

A corporation has many avenues to raise capital. It can sell shares of stock and create new types of stock, such as preferred stock, with different voting or profit characteristics. Partnership difficult to rising additional capital but easier than sole proprietorship, that is because, sole proprietorship are the only owner, therefore can’t sell any shares to fund business growth, and banks are more skeptical about lending money to sole proprietorships.

There are several advantages to being a sole proprietorship. First, the sole proprietorship entity is a quick, inexpensive and easy form of business to establish, and can be inexpensive to wind down. In this type of business, there are no specific business taxes paid by the company. The owner pays taxes on income from the business as part of personal income tax payments. A sole proprietor has complete control and decision-making power over the business, and is therefore free to choose the direction of the business and it strategies and policies. Sale or transfer can take place at the discretion of the sole proprietor. Sole proprietorship can control all the asset and money of business and can take money out of company for personal use at any time, as long as make sure the business bills are paid. Sole proprietorship is relative freedom from government control. The further advantage is that the owner claims all the profits of the business.

There are several disadvantages to being a sole proprietorship. Sole proprietorship’s business is not a separate legal entity. Therefore, if the business is involved in any form of legal dispute, the individual owner has unlimited liability, which means the sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company. The sole proprietorship relatively limited viewpoint and experience that is because sole proprietorship is limited by the skill, time and investment of the individual owner. Sole proprietorship are unstable business life, the enterprise may be crippled or terminated upon illness or death of the owner.

There are several advantages to being a partnership. First, the partnerships are relatively easy to set up however time should be invested in developing the partnership agreement. Partnership files informational tax return.  Partnership income is reportable and taxed on partners’ personal income tax returns. The main advantage of a partnership over a sole proprietorship is that the partnership combines the skills, talents, and knowledge of two or more people, and all partners have equal rights in the management of the partnership business

The main disadvantages of partnership are partnership is characterized by unlimited liability. Therefore, the partners are fully responsible for all business debts and obligations, irrespective of their involvement in the entity. The partnership form has a limited life therefore it may end with death, incapacity, withdrawal or bankruptcy of any partner. A great number of partnerships find themselves involved in disputes because of disagreements concerning profit sharing or decision making for the business. Partnership is limited financial therefore it may only borrow money or use partners’ savings. Must be dissolved and reformed to admit additional partners wishing to invest. A further disadvantage is known as mutual agency. Mutual agency is every partner acts as an agent for the partnership and for every other partner. Therefore, a partner can represent the other partners and bind them to a contract if he or she is acting within the apparent scope of the business. Partnership is relative difficulty in obtaining large sums of capital. This is particularly true of long term financing when compared to a corporation. However, by using individual partners’ assets, opportunities are probably greater than in a proprietorship.

The main advantages of forming a company is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation’s debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities. Companies are attractive investment. The built-in stock structure of a corporation makes it attractive to investors. The company form has a continuity of life, it has the power to exist forever and, therefore, is unaffected by the death of an owner or manager or by the transfer of ownership interests. Other advantages of company is taxation, owners of a company only pay taxes on company profits paid to them in the form of salaries, bonuses, and dividends. The company pays taxes, at the company rate, on any profits. Companies also have the ability to raise large amounts of capital through public share offerings. Companies have a set management structure. The owners of a company are shareholders, who elect a Board of Directors, which then elects the officers. Other than the election of directors, shareholders do not participate in the operations of the company.

There are several disadvantages to the company form of business structure. First, the company is more expensive and time-consuming to establish. Companies are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. Company set up cost are expansive that is because company have to pay many fees to set up the business there are the initial formation fees, filing fees and annual state fees. Beside that, paperwork is a huge component of the company formalities that must followed. For example, business bank accounts and records must be maintained and kept separate from personal accounts and assets. . In company may result in higher overall taxes. C corporations have potential double-tax consequences — once when the company makes its profit, and a second time when dividends are paid to shareholders. S corporations can mitigate this tax issue. Company is disclosure of names of corporate officers and directors. Most states do not require that names of shareholders be a matter of public record; however, many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed with the Secretary of State. The proper corporate formalities of organizing and running a corporation must be followed, to receive the benefits of being a corporation.

I preferred form a sole proprietorship. Sole proprietorship business has many advantages suitable to form in Malaysia. First, a sole proprietorship is the most basic of all forms of business ownerships. Many small businesses are sole proprietorships. Next, a sole proprietorship is easy to establish compare to partnership and company. Sole proprietorship doesn’t have to do anything special or file papers to set one up. Sole proprietorship typically requires few if any legal documents and minimal record keeping. Beside that, sole proprietorship may register a trade name to promote its products and services.

The sole proprietorship is not a taxable entity. Income from the organization is simply added to the owner’s personal income to determine taxable income. Sole proprietorship only one person involved in the business therefore it is easy to dissolve if and when the person decides to stop operating as a business.

A sole proprietorship is the least expensive type of business structure to establish. There is no need for a lawyer or for an excessive amount of money to be set aside in order to pay a number of fees. Corporations are much more expensive to start up. Therefore, sole proprietorship can be started fairly easily with minimal capital requirements.

A sole proprietorship, on the other hand, does not require any set payroll system or any other financial business structure. Many sole proprietorships simply set up a separate account at their banking institution for their business funds and record all applicable business expenses in the management of that account.

Since the sole proprietor is not a legal entity, the owner is entitled to all profits generated from the business and can exercise his entrepreneurial skills to the full. The sole proprietor is the boss, the owner, and the company all in one. Sole proprietorship provides an individual with the ultimate control that they may be looking for when they go into business for themselves. There are generally no partners to answer to and therefore sole proprietors can enjoy being their own boss and having 100 % decision making abilities and responsibilities including taking personal business risks that may end up paying off well, operating in whatever way owner want.

The most important reason that I preferred form sole proprietorship is sole proprietorship forms can expansion of the business with additional equity holder change of form from a sole proprietorship to a partnership or a conversion to a corporation or a Limited Liability Company. Although is difficult but it also have a success case. A classic example is the Kamdar Department Store, a multi-million ringgit business, which was a sole proprietorship business for a long time before it became a private limited company.

Bibliography:

1. Accounting text & cases

-Robert N. Anthony -David F. Hawkins -Kenneth A. Merchant

2. Book-keeping and Accounting 5th Edition

-Sheila Robinson & Frank Wood

3. Financial Accounting In Australia Second edition

– Allan Duffus

4. Accounting

-Hoggett -Edwards -Medlin -Tilling

5. Accounting

-Warren Reeve Duchac

6. Accounting irregularities in financial statement

– Benny K.B. Kwok

7. Foundation of Business Accounting Second Edition

– Roy Dodge

8. Financial Accounting

– A. Mukherjee – M Hanif

9. Business Accounting 1

– Frank Wood & Alan Sangster

10. Financial Accounting Information (The Alternative to Debits and Credits)

– Porter 1 Norton

11. Principles of Accounts

– Fay Thompson-Hosein