Question

You are working as an accountant. One day Ali calls you to make an appointment for a meeting. At the meeting Ali is very excited to share great news. Ali and his new best friend Fatiha have decided to open a new restaurant offering halal food in COVID-19 safe booths. They do not know whether they should trade as: (1) a sole trader where Ali will be sole trader and hire Fatiha as a manager because she has less experience in running a restaurant; (2) partners; or (3) establish a Pty Ltd company.

Ali asks your advice. Which type of entity would be the most beneficial for Ali? Briefly explain to Ali the nature of all three options, including their advantages and disadvantages.

Answer 1

	1. Sole Trader	2. Partnership	3. Pty Ltd. Company
Ownership	Single owner	More than one owner	Multiple owners
Liability of Proprietor/ Partner / Shareholder	Unlimited	Unlimited	Limited
Legal entity	Not a separate legal entity	Not a separate legal entity	Separate legal entity
Startup costs	Very low	Low	High
Access to funds	Low	Medium	High
Compliance requirements	Practically none	Medium	Very high
Audit of books	Not required	Might be required	Mandatory
Life	Can be closed down at the will of proprietor	May be dissolved if the partners so desire	Perpetual existance
Separation of ownership from management	No	No	Yes
Property	Property held in the name of proprietor	Property held in the name of partners	Property held in the name of company
Degree of control	Proprietor has full control	Partners share control	All shareholders exercise control through voting

Depending on the need for funds, Ali should decide whether to start the business as a sole proprietor, or as a partnership or as a company. Companies have much higher access to finances as compared to proprietorships or partnerships. Lenders are more keen to lend to a company as it is a separate legal entity. Even angel investors would prefer to invest in a company, as it is mandatory to get the books audited by auditors.

Also, companies facilitate perpetual succession by separation of ownership from management. But the compliance requirements for a company are stringent. Having said that, the personal assets of Ali or Fatiha would be immune from the debts of the business if the business is formed as a company, as their liability would be limited only to the amount remaining unpaid on their shares if any.

Life of a company is perpetual, i.e, it continues till the company is liquidated. Therefore, even if the proprietors or partners pass on, the business of the company is carried on by the management, i.e the board of directors.