Question

Define the following types of business ownership. Sole Proprietorship Partnership Corporation Limited Liability Company

For each type of ownership listed in #1 above, list the pros (advantages) and cons (disadvantages). Be sure to pay close attention to owner liability and tax treatment for each type of business ownership.

Answer 1

Business can be defined as an organization run by an individual or more than one individuals.

Business on the basis of ownership can be mainly divided into :

a) Sole proprietorship, b) Partnership, c) Corporation Limited , d) Liability Company

a) Sole Proprietorship :

• Meaning :- This is the kind of business which is solely run by a single individual. These are mostly small scale business or home based industries etc. Here there is no difference in owner nad business entity.
• Advantages of Sole propreitorship :

1) Sole Ownership : The first and foremost advantage of sole proprietorship is that the single person weho is the owner of business enjoys complete freedom.

2) Formation : Such business is easy to form as it solely depends on one person's decision.

3) Capital : The capital required for the business formation of such organization is way too less compared to large MNC's.

4) Decision- making : As the owner is a single person, the whole decison making power lies with the owner.

5) Profit : Profit gained is solely the owners there is no need to distribute it among anyone else .

• Disadvantages :

1) Losses : The first and foremost disadvantage of such business is that the losses incurred is solely the owner's liability.

2) Income or additional capital : When it comes to any requirement of extra capital , the sole owner has to take the burden of it be it a loan or way finding the source.

3) Tax Payment : Whatever Tax is to be paid the sole owner is burdened. Tax calculation of such organization is different and mostly considered person's tax

4) Continuity : The continuity of this business is limited till the life of sole owner.

B) Partnership :

• Meaning :This is business entity where there are two or more persons forming the organization.
• Advantages :

1) Decision - making : The decision making is done by two or more persons.

2) Profits : Higher the capital investment, the share of profit accordingly.

3) Capital : It is contributed by various persons according to each ones ability.

• Disadvantages of partnership :

1) Formation : All members should agree upon the formation and then only it can be formed .

2) Tax : Tax Liablity is equally shared by each members and it is different from personal tax.

C) Corporation limited

• Meaning: These are companies listed at companies house . These company are run by elected board members mostly shareholders.
• Advantages :

1) Decision making : Elected board members have a full authority to decison making.

2) Profit sharing : The Board menbers as per their position enjoy the profit. For example : preference shareholders enjoy preferences etc.

3) Capital : Here there is no risk of money investing or no need to bring in capital. acapital in such corporation are by selling and buying of shares.

4) Continuity : This type of business has continuity. The ownership are passed on.

• Disadvantages :

1) Taxation : In such corporation , in a sense double taxation takes place. The shareholdes pay for their dividends as well as a corporation or company.

2) Management : They can run business independently.

D) Limited liability Company :

• Meaning : These are similar to corporation limited which has liability limited.
• Advantages of Limited liability :

1) Flexibility : The first and foremost advantage of such business is flexibility.

2) Ownership : There are no ownership restrictions.

3) Tax : There is flexibility involved in terms of tax as well.

4 ) Liability : There is a limitation on liability and thus enjoys benefit on loss incurred.

5) Lesser Restrictions

• Disadvantages :

1) Less benefits enjoyed by employed employees in such company.