Forms of businesses
Melissa Hill is considering setting up a health food store in Manchester and is now thinking about the type of ownership structure for her business. Introductory research revealed that there are three (3) business types.
1. Sole trader
3. Limited liability company
Prepare a document (not more than two thousand words) which explains the three forms of businesses and which clearly highlights the advantage and disadvantages of each.
Business is the art of providing services and products with the intention of making profits. In the process of establishing a business enterprise, an individual needs to decide the form of business that he ventures before registering the same (Jelsma and Nolkamper 2018). Accordingly, there are three major business forms which include sole trader, partnerships and limited liability companies. Each and every of these forms have their share of advantages and disadvantages in almost equal measures. An inspiring business person needs needs to evaluate the advantages of each and then decide from a point of knowledge. However, it is important to take note that all business need to have some level of legal configuration which determines the rights and liabilities of all stakeholders (Jelsma and Nolkamper, 20180. Such kind of decision requires a lot of due diligence and thus such potential entrepreneurs need to widely consult with experts and professionals to avoid making mistakes. Some of the factors that people might want to consider when deciding the form of business include the level of control they would wish to have, the possibility of law suits, tax implications and also the possible profit or loss levels. In view of the above, this analysis evaluates sole trader, partnerships and limited liability companies.
Alternatively called sole proprietorship, sole traders are people who do business individually without partnering with others in terms of the management of the enterprise. Most small businesses are individually owned under the concept of sole trader (Boeger, 2018). Some of the examples of sole traders include freelancers, independent contractors among others. It is a form of self-employment for the owners who manage and make decisions that affect the business in one way or the other. One unique feature with sole traders is that the business lacks separate legal identity and personality and thus it means that the owners is legally responsible for anything or lawsuit that emanates during his trade. Even though sole business lacks legal personality, its flexible to manage because the sole trade makes decisions fast without having to convene bord meetings from such deliberation and therefore can save any emerging issues in time (Boeger, 20180. The level of simplicity that comes with sole trader makes it a preferred model for people who want to venture into business. One other thing that makes it a common business models is the amount of money required as capital when starting the business. Usually, it is possible to start small and grow with time as profits continues to stream in. the promoters or the sole traders are also accountable to themselves and thus its preferable to most people.
Advantages of sole trader
There are several advantages that come with doing business under the model of sole trader, which often times make it a choice for most people who venture into business for the first time. One of the advantages of the sole trader form of business is that it has not structure for accountability (Mikhailova et al., 2020). The owner does not have to be accountable to anybody I terms of how he spends the money from the business. Similarly, it is easy and flexible to manage and operate business under the model of sole trader because the owner makes decisions individually and quickly considering that he doesn’t have to consult any one regarding such decisions. As such, it saves time and also the business especially where the business is faced with certain emergencies. Also, the owner under sole proprietorship obtains all the profits for himself without having to share with others like happens in partnerships. The advantage that comes with sole proprietorship is the fact that it is cheap to start and manage compared to other forms of doing business that would require registration and licensing (Abuselidze and Katamadze,. 2018). It also provides some level of privacy because it is not subjected to inspection of accounts like happens in with limited liability companies. As such, competitors have less information concerning the business and therefore cannot tell the source of the business success.
Operating business under sole proprietorship also comes with equal share of disadvantages. The first disadvantage that comes with sole trader is the element of personal liability. Essentially, the business lacks a separate legal identity from that of the owner. The ripple effects are that it makes the owner personally liable for its debts and all forms of liabilities that might accrue during the course of trade (Boeger, 2018). In case the business fails, the owner loses income and his assets might be attached during legal proceedings for recovery of debts. Sole traders do not enjoy some form of prestige like those who do business under partnerships. Even though it might not necessarily be accurate, the public always view sole traders as small businessmen and as less professional in their work. Some client and customers also prefer not to deal with sole proprietors for fear of risks that might be associated with doing so (Boeger, 2018). Unlike in limited companies, sole proprietorship lacks legal personality and thus cannot be sued in its own name. such scenario scares most customers and therefore making the sole trader to lose customers.
It might also be difficult for sole traders to obtain funds from secured creditors like banks because they always prefer to lend to enterprises with some level of accounting transparency. Due to such, and the level of risks that might come into play, banks usually remain adamant or reluctant to lend such traders large sums of money (Jelsma and Nollkamper, 2018). This may hinder the trader from expanding. The business in real time like happens with limited companies. The other problem with sole proprietorship is the fact that the sole trader lacks a person to share his ideas with because he is all alone in the enterprise. As such, he might make wrong decisions whenever he has dilemmas on how to tackle challenges in business. Also, sole proprietorship lacks continuity especially where the sole trader dies. It would mean that the business stops to operate due to poor management after the death of the owner or the family might decide to sell the business to another person (Boeger, 2018). Lastly, Sole traders have poor work-life balance considering that they have to do everything by themselves and therefore they can’t find time for other activities like leisure.
Partnership is a form of business where two individuals agree to work together as business partners to advance their mutual interest of profit-making. The partners in such arrangements must not only be humans, but can be organizations, schools and other entities that accept to do business together under partnership arrangements (Mikhailova et al., 2020). One of the features of partnerships include agreement between parties. Accordingly, parties must agree between themselves on the terms of their agreement, creating rights and responsibilities that bind them during the course of their business. The signed agreement therefore becomes the foundation of the partnership between those agreeing to do business together. Secondly, for partnerships to arise, there must be two or more people joining their interests to pursue them together, meaning that partnership can only exist with two or more persons (Abuselidze and Katamadze 2018). Also, the intention of the partnership must be for purposes of profit sharing.
There are three major forms or types of partnerships, which include general partnerships, Limited partnerships and limited liability partnerships. In general partnerships, two or more individual form the association and they represent the organization in equal shares (Boeger, 2018). On the same breadth, they share the liabilities, debts and profits equally while also having equal rights when it comes to making decisions affecting the business. Limited partnerships on the other hand includes both general partners and limited partners. In such arrangements, the general partner has unlimited liability while the limited partner has limited control over the enterprise.
Advantages of partnerships
Like sole proprietorship and other forms of business, partnership has its fair share of advantages. First, partnerships help in bridging the gap in both expertise and knowledge (Boeger, 2018). Usually, partners in a business have different qualification and experience and therefore they can easily discuss the problems facing their business and come up with a lasting solution. For instance, one partner might be good with coming up with new ideas but not really good with selling or imparting those ideas to others. As such, partnership provide them with an opportunity to share skills and talents between themselves. Also, partnerships pump more cash flow into the business (Boeger, 2018). Accordingly, whereas one partner might no have enough funds for the business, the other could be having lots of connections that the enterprise could use to source for funds.
Besides, the right business partners can also enhance the others to borrow money from lending institutions because they are guaranteed of making profits which they would use to return the borrowed amount of money from secured creditors (Jelsma and Nollkamper, 2018). Partnerships also help in cost savings as partners share the burden of keeping the business afloat. Such situation helps in saving some funds that would gone into such business had it not been partnership. For example, in sole proprietorship, the sole trader has the burden of financing every activity in his trade and thus takes away from him so much of money than would if it were partnership (Boeger, 2018). Moral support is also another benefit of partnership as the other partner or partners can offer support during challenges and setbacks. It also helps in balancing work and other life activities like leisure.
Disadvantages of partnerships
On the other hand, partnerships also have several disadvantages just as much as with the advantages. One disadvantage with partnership is the fact that it can sometimes be difficult to start and maintain. The legal requirement for registration of the same might be time consuming and also expensive, because the parties would require the services of lawyers to create binding relationship in terms of rights and responsibilities (Jelsma and Nolkamper, 2018). What’s more, there is every possibility of a partner becoming responsible for the decisions that was made by other partners. Partnerships also lead to loss of autonomy. Where one is used to have absolute control over his business, partnership destroys such experience because now every decision must be discussed by both partners if its something that will be affecting the business whether good or bad. Emotional issues also make partnership disadvantageous especially where partners can’t get to agree on basic things that affect their relationship like conflict of interest. Under such circumstances, the business is likely to suffer losses because partners cannot make quick decisions to salvage the situation thereby creating uncertainties (Boeger, 2018). There is also likely to be future selling complications where one partner feels there is need for them to sell the business for one reason or the other, but the other partner feels contrary.
Limited Liability Company
Limited liability company is a form of business that comprise or combines partnership with corporates. Under such arrangements, the owners and managers are not individually liable for the company’s liabilities and debts 9Boeger, 2018). The regulations that govern such companies differ depending on states, with each state having its own unique regulations and laws on the same. Considering that most states don’t restrict ownership, it is possible that anyone could be an owner of limited liability company include organizations and other entities that are not human. It can also be defined as a more formal or structured form of partnership that does not necessarily need the promoters to file the articles of organization with state department (Mikhailova et al., 2020). In limited liability companies, the owners might choose not pay taxes but instead list their profits and losses on their personal tax returns.
Advantage of Limited Liability Company
Limited liability companies have certain advantages that make it more appealing to investors than the other forms of doing business. The first advantage of such companies is that they have fewer corporate formalities (Boeger, 2018). When it comes to other corporations, the law requires that they must hold bord meetings and keep minutes of such meetings. However, such requirement does apply when it comes to limited liability companies. Such help helps the limited liability companies to reduce the paperwork and complications that might accrue from the same. Again, limited liability companies do not have strict restrictions when it comes to ownerships. For instance, the law requires that corporations cannot comprise of more than one hundred stockholders, all of whom must be natural persons (Abuselidze and Katamadze, 2018). Such requirements do not apply to limited liability companies.
Limited liability companies also have the possibility of using cash method of accounting as opposed to other corporations that are restricted to the use of only accrual accounting methods and systems. That way, it becomes more flexible in terms of accounting when using the limited liability companies compared to others (Boeger, 2018). It is also possible to place membership interests on living trust when using limited liability companies. Also, there is tax flexibility when it comes to limited liability companies because they don’t suffer double taxation. They fall under the same category with partnership or sole proprietorship that are classified as ‘pass-through” organizations. It is also possible with limited liability companies to deduct losses by active members against other member`s regular income (Boeger, 2018). However, its prudent to observe that such deduction are only permissible to the extent that the law permits.
Disadvantages of Limited Liability Companies
Like with the advantages, limited liability companies also have certain amount of disadvantages that accompanies it. First, it is very expensive to establish limited liability company. The law requires that it should be registered and such process of registration requires a lot of funds in terms of paying the lawyers their legal fees and other expenditures (Jelsma and Nollkamper, 2018). Also, the profits originating from the limited liability companies are subject to Medicare and social security deductions. It means that there are instances when those who own the limited liability companies might end up paying more taxes compared to those who own other corporations or business models. The salaries and profits from the limited liability companies are subject to deductions under self-employment tax, which adds up to about fifteen percent (Mikhailova et al., 2020). Lastly, it is a requirement under the limited liability companies that owners must recognize their profits. Unlike the limited liability companies, other corporation do not distribute the profits to the shareholders in the form of dividends.
In conclusion, ever aspiring business person needs to evaluate the models of doing business before choosing the one that suits his demands, interests and present realities. Among the available models are sole proprietorship, partnerships and also limited liability companies. Whereas sole proprietorship implies business in which a singular owner manages and makes every decision, partnerships involve two or more people coming together to do business and share profits. Whichever model one chooses, there both advantages and disadvantages as this analysis has described above. Accordingly, Mellissa Hill must therefore evaluate all the advantages and disadvantages of each model and decide on the one that meet her realities and interests.
Abuselidze, G., & Katamadze, G. (2018). The importance of legal forms of business subject for formation of business environment in Georgia. Kwartalnik Nauk o Przedsiębiorstwie, 49(4), 83-88.
Boeger, N. (2018). Beyond the shareholder corporation: alternative business forms and the contestation of markets. Journal of Law and Society, 45(1), 10-28.
Jelsma, P. L., & Nollkamper, P. E. (2018). The limited liability company. LexisNexis.
Mikhailova, L., Avkhadiev, F., Asadullin, N., & Gainutdinov, I. (2020). State regulation of the development of small business forms. In BIO Web of Conferences (Vol. 27). EDP Sciences.