Advantages and Disadvantages of Partnership, Essay Example

Sole proprietorship is a business run and owned by one person where the law does not distinguish the business from the owner. It is the easiest business to establish since there are no requirements that formally guide on how to start and the capital required is minimal. The proprietor has unlimited personal liability and is at the liberty of deciding what to do with his profits/losses.

A sole trader gets to enjoy several advantages for running this type of business.  For instance, the business requires minimum capital to start up as well as few formal requirements. Decision making is easy in this case since it’s done by one person hence taking a short time. The tax returns procedure is also simple because the owner submits the business returns in his personal income form. The proprietor completely controls the business so he can decide to sell or transfer it at his own discretion.

Sole proprietorship also has some cons. In its formation, this business is not a separate business entity which implies that the business ceases to exist when the owner dies or becomes disabled. This form of organization is said to have unlimited liability. The owner is therefore liable for obligations and debts of the business. Decisions are only made by the proprietor and this exposes him to the risk of making uninformed decisions unlike in corporations where decision making is collective. It is unlikely that investors will be interested in sole proprietorships which cause challenges in raising capital and this too works to its disadvantage.

Partnership is a form of business organization where two or more parties come together to carry on a business or trade for mutual benefit. The partners share liabilities, profits, debts and losses equally depending on whether one is a general partner or a limited partner. General partners participate equally in daily management of the business while limited partners take a bigger part in investing but are not involved in management directly. Profits and losses are shared amongst the partners after which each person is taxed individually.

Partnerships do not have to be registered with the state hence are not expensive to start up unlike corporations. A partnership is not entitled to corporate taxes because profits and losses are distributed amongst the partners and they are taxed individually. In general partnership, all partners are disadvantaged because they will be personally held liable in case the business incurs liabilities and debts. (Nolo.com 1999)

Corporations are businesses that are created as a result of corporate law. The corporation’s existence is said to be distinct from its members. It acts as a separate entity such that it can transact, sue and be sued and do other things like paying tax separately from its owners. According to LLI n.d., individual states have the power to promulgate laws relating to creation, organization and dissolution of corporations. In every corporation, there’s need to have articles of incorporation to keep a record of its creation and to outline instructions on how to manage internal affairs. It is also assumed that those corporations adopt bylaws to clearly outline obligations and rights of parties involved in its structure.

Some of the major advantages enjoyed by corporations are limited liability which means that the shareholders’ assets are not at risk in case of debts or liabilities. Corporations pay corporate taxes which are relatively lower especially if the company is making huge profits. Due to their large nature and structure, corporations attract investors as well as talented and skilled employees since it is capable of offering stock or options as an incentive. Corporations also have well defined structures that are operational, have a perpetual existence and transfer of shares is done freely.

On the other hand, corporations are disadvantaged due to high costs of incorporation, mandatory legal formalities, huge paperwork involved in their running and requirements that involve disclosure of corporate directors’ and officers’ names. Dissolving corporations is a lengthy process that can sometimes be very expensive.

Limited liability companies are termed to be flexible in that they combine elements of partnership structures, corporate structures and even sole proprietorship structures. The limited liability company has several things in common with different forms of business organization. For instance, in a corporation and a partnership, it shares limited liability and the ability to pass-through income taxation respectively.

The positive impacts of forming a limited liability company include its limited liability, ability to avoid double taxation, simplicity in establishment and management, flexibility when it comes to distribution of income, no limitation on ownership and its attractiveness to investors worldwide. There are however a few drawbacks in limited companies. These are; business complications between states due to differences in laws governing limited liability companies, set limit of its existence and undefined procedures due to its newness. An aggressive entrepreneurial firm would best fit in a limited liability company since it allows for flexibility in running the company.

References

LLI ( n.d.). Corporations. Retrieved on November 11, 2010 from http://topics.law.cornell.edu/wex/Corporations

Nolo.com (1999). Advantages and disadvantages of Partnership. Retrieved on November 11, 2010 from http://www.inc.com/articles/1999/10/14602.html