Sole Proprietorship
The discussion of case study helps the reader in understanding the various aspects of business structures. Single owner runs a sole proprietorship due to which he enjoys the freedom of doing business. However, he has to face various problems such as unlimited liability, difficult to change ownership. On the other hand, partnership is a formal agreement between two or more person who wish to come together and run a business. Partnership firm is the combination of various people that help in generating innovative ideas. However, financial risk goes side by side with partners, as they are responsible for all profit and loss. By forming a partnership firm, the innovative ideas are develop due to various persons but there is financial risk goes back with the partners as they are liable for all the profits as well as loss. Company is a legal entity that is designed by association of persons (Caramela, 2018). In the given report, a case study is prepared on these business structures with their advantages and disadvantages. Each business structure has to face some legal issues that are highlighted in the report.
A sole proprietorship is that type of business that is run through single person. The control of the business entity lies with only one person that is biggest advantage sole trader gets (Price, 2014). According to Baik & Lee, (2015) the sole proprietor business has no separate presence from the owner. It means owner is accountable for all the liabilities as well as profits. A sole proprietorship, as reported in the handbook of Korchak, (2017) is a business of one owner who has unlimited liability. On the contrary Monte, (2017) stated that sole proprietorship is the simplest form of business enterprise. Due to no separate entity of the sole proprietor, he or she signs the contract in his or her name only. In the words of Castledine, (2018) it is highlighted that there are few taxes and legal formalities for starting sole trade in Australia. For setting up of sole partnership business in Australia, one can choose to start the business in his own name or register for an ABN and GST if the expected turnover is more than $75000 per year. In the words of Huebsch, (2018) a sole proprietorship has single owner who handles all the day to day operations and keeps the profit and asset with him or her.
- There is no one to control the business entity therefore the person is fully independent to take any decision.
- The owner of the business enjoy all the profit of the business expect paying the taxes.
- The privacy of the information can be kept easily as there is no one to leak the information.
- The sole proprietor enjoys the flexibility in business as he or she alone is responsible to make changes. The Sole Trader Can Change The Operations Of The Business As Per Changing Requirement. For Making Changes, He Or She Does Not Require Permission From Other.
- It is easy for the sole proprietor to change the legal structure later as per the circumstances.
- The owner of sole proprietor can freely mix his personal and business assets together.
- The formalities in sole proprietor are little as compared to other business structure.
- There is no corporate tax payment for the sole trader.
- The legal cost for forming a sole proprietor is low.
- Besides enjoying the independency to run business, there is unlimited liability on the sole trader.
- It does not facilitate other partners to share the risk or portion of the business.
- As only one person takes the decision, so there is lack of innovative ideas in the business.
- Due to limited life of the person- if the owner dies, the business may close.
- There is unlimited liability on the single person- if the trader incurs any debt, creditor will have the right to claim against the owner’s private properties such as family house.
- It is problematic to change the possession when selling the business.
It is a formal agreement between two parties to manage and operate the business. According to Masters, (2018) partnership is the easiest way to start the business with other person. Saebi & Foss, (2015) in his book stated that the partnership is between two or more person carrying out a business for making profit. On the contrary, Adrian (2019) stated that two or more persons who wish to come together to form a business commonly form partnership. According to him, they may have common business idea that partners want to taste and realise their talent or capabilities. In his perception, rather than operating a small business with low revenue, partnership is often a worthy choice to form a new business. Accounting tool, (2017) stated that there are two types of partners in the business. First is limited partners who only contribute funds in the business but do not take part in the day-to-day operation of the business. He or she will be only liable for fund invested by him or her. However, once those funds will be paid back, the limited partners have no liability left in relation to activities in the partnership. On the other hand, general partner is one who takes actively part in every activities of the firm that means he contributes in fund as well as in day-to-day operation of the business. On the contrary Murray, (2017) stated that there are salaried or equity partners also where some partners are paid as permanent employees and others have only a portion in the ownership. According to him, partnership business do not pay income tax rather than the partners pay the taxes according to their share of profit for specific year.
- By forming a partnership, partners help each other by sharing the responsibilities of running the business. This will permit the partners to use most of their competences. They can rive the work according to their talents rather than taking the same share of each task of business (Beaupert, Steele & Gooding, 2017). For example- if a partner is good with figures, he or she can deal with the accounts part or if other partner has good knowledge about selling of product, therefore he or she can become the sales person.
- Partners can share the decision-making authority and can support each other whenever they need. All the [partners enjoy the right of taking the decision in partnership. Due to this, they give their best in solving the problems that business run into (Adrin, 2018).
- A partnership is generally easy to form, manage, and run. As compare to company, they are less strictly regulated in terms of laws leading the formation. They are more elastic in terms of management, as partners have only say in the business (without any intervention of shareholders).
- Due to its nature, the partners will provide the fund in the business with start-up capital. It means that, more partners in the firm, higher potential of growth of the business. However, more growth leads to more profit distributed among the partners (Adrin, 2018).
- The partners in the business are subject to unlimited liability, it means that every partner share the monetary risks and liability of the business.
- The major disadvantage is the disagreements between the partners in the business. It is obvious that the perception of each person is different somewhat. In the partnership business, people have different idea about how the business should run, what is the best interest of the business, and who should do what. These disagreements not only harm the business but also detriment the relationship between them (Australian Taxation Office, 2018).
- Comparing to sole trader, the decision-making in partnership is slower because the partners need to discuss and consult with each other for taking any decision. In this case, if one partner disagrees at some point, time is required to negotiate with that person in order to build the agreement. Sometimes due to this, opportunities are lost. Besides this, partner get frustrated who used to make all the decision for their business.
- As compare to sole trader, although the partnership firm able to contribute more capital but still it find more difficult to raise money than a company does (Korchak, 2017).
Partnership
A company is an authorized entity made up of association of individuals for carrying out an industrial or commercial enterprise. Company is formed for the common purpose in which members organize their skills and resources to achieve specific goals. According to Lord Justice Lindley, “a company is an association of peoples who contribute the money and share the profit and loss arising therefrom the company. In words of Agarwal, (2016) a company is registered association that is artificial legal person, having independent legal entity. There are various types of companies that are discussed below with the help of chart-
James, (2008)
- Shareholders have the right to participate in profits of the company without bearing any personal liability.
- A company can accumulate large amount from various shareholders, as there is no limit prescribed in the public company regardinmg the number of shareholders.
- When a company amalgamated, it becomes separate legal entity. The members of company may go but company continues forever. Death and retirement do not affect the existence of company.
- The accessibility of more resources enables the company to invite best talent by offering them high salaries and better career opportunities.
- As compare to sole trader and partnership, company can afford to spend large amount on research projects. It enables them to survive up with the changing conditions of business.
- In company, various persons are there that enable company to take up new ventures by sharing the risk.
- As management of the company remains in the hands of many persons, due to which sometimes secrecy of information cannot be kept.
- At the time of incorporation, there are various regulations that company have to follow. Due to this, it becomes difficult for company to fulfil all the obligations.
- The management and operation of the company lies in different hands. Owners are the shareholders of the company on the other hand control lies in those hands that do not have any stake in the company.
- The first and foremost issue that is faced by all type of business structure is incorporation procedure. As compare to sole proprietorship and partnership, company have to comply with various laws before forming it. For example for starting a company in Australia, one has to obtain “Australian Business License and Information Services” (Business Queensland, 2018).
- Employment- the most legal issue faced by the company is employment. Every company who have at least one employee has to consider the regulation of employee in efficient manner. All those workers who are working in the company, it should ensure the health and safety on the workplace (Australian Government, 2018).
- As soon as the business incorporated, the legal issue for business structures is tax. In the sole proprietor, all the taxes are bear by single owner. As per Australian law, partnership firm must be registered for GST if its annual turnover is $75000 or more than that (Evans, Lignier & Tran, 2013). In a company, the members have to pay their personal tax for wages, dividends, shares, or loan.
- For starting a sole proprietorship in Australia, the registration with “Australian Securities and investment Commission is must. However, the process is simple and completed online with minimum time (Australian Government, 2018).
For starting any business structure, it is necessary to search all the legal requirements for every structure. Besides it, it is advisable to comply with all the rules and licensing requirements. Sole trader should be started in case if there is sufficient fund and innovative idea to sustain in the competitive market. In partnership firm, it is advisable to draft a deed of partnership at the time of incorporation so that every partner will be aware of what processes will be followed in case of any disagreement and what will happen if partnership will dissolve. . In addition, it is recommended that a company should fulfil all the employment conditions such as providing safe and healthy working environment.
Conclusion
The above report states that there are various types of business structures. Each business structure has separate benefits and limitations. In the sole proprietor, sole trader enjoys the flexibility according to the changing circumstances that it is less in partnership and company. There is few problem faced by partnership firm and company in terms of start-up capital as there is sufficient number of persons to contribute capital but in sole proprietorship there is sole trader due to which he or she sometimes face problem due to limited fund. In the sole proprietorship the decision are taken fast as company to other business structure. The tax liability for each business structure is different depends on the scale of operation and turnover.
References
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Adrin. (2010). Advantages and disadvantages of partnership. Retrieved from: https://www.thecompanywarehouse.co.uk/blog/advantages-and-disadvantages-of-partnership
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Caramela, S. (2018). How to Choose the Best Legal Structure for Your Business. Retrieved from: https://www.businessnewsdaily.com/8163-choose-legal-business-structure.html
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Huebsch, R. (2018). Definition of Sole Proprietorships. Retrieved from: https://smallbusiness.chron.com/definition-sole-proprietorships-3955.html
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Price, J. (2014). Pros and cons of business structures: Sole Traders, Companies and Partnerships. Retrieved from: https://www.jpabusiness.com.au/blog/james-price/2014/04/13/pros-and-cons-of-business-structures-sole-traders-companies-and-partnerships
Saebi, T., & Foss, N. J. (2015). Business models for open innovation: Matching heterogeneous open innovation strategies with business model dimensions. European Management Journal, 33(3), 201-213.
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