Question

1 Compare the advantages and disadvantages of sole proprietorships.

2 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

Answer 1

Compare advantages and disadvantages of sole proprietorships.

A sole proprietorship is a business owned and operated by one person (owner). The owner and the business entity are one and the same. The liability of the owner is unlimited with respect to his debts.

Advantages of soleproprietorship

1. Ease of formation. It is easy to form a sole proprietorship. It is a simple form of business organization. The formalities are few when compared to company form of organization.
2. The decision making is prompt. Since the owner makes all business decisions, decision making is swift and business opportunities can be quickly captured.
3. It is easy to wind up. Just like formation, winding up a sole proprietorship is also easy.
4. It is less expensive to start a sole proprietorship. Working capital requirements are also lower. Usually small business prefer this type of business organization.
5. Tax advantage. Sole proprietorship owners file the profits of the business on their personal income tax returns. So there is no double taxation as in the case of company form of organization. In company form of organization, businesses pay taxes on their profits and individuals pay income tax on their earnings from the company.
6. The owner enjoys all profits of the business.
7. Flexibility in operations.
8. Business secrets can be maintained.

Disadvantages

1. Limited growth. Since sole proprietorship is managed by one person, the growth of the business is also limited. This form of business organization cannot be suitable for bigger businesses.
2. Discontinuity of business on the death of the owner.
3. Limited finance. These type of businesses can only raise limited capital, whereas, companies can raise large amount of capital.
4. Unlimited liability. The liability is unlimited which means that the personal assets of the owner can be lost.

2. Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

               Partnership is owned and operated by two or more owners or partners.

A general partnership is where all partners have equal authority to manage the day-to-day affairs of the partnership. The liability of the partners is unlimited. The personal assets can also be attached by the creditors.

A limited partnership on the other hand is one where a partner is a ‘silent partner”. The partner cannot take part in the day-to-day management of the partnership. He is only an investor and his liability is also limited. At least one partner should be a general partner in a partnership.

Advantages of partnership are ease of formation, regulations are few, more partners means more expertise, taxes of the partnership are passed through the income tax returns of the owners like sole proprietorship. Business risk is shared. Business secrets can be safeguarded. Flexibility in business operations. It is suitable for small organizations where the capital needs are not very high.

Disadvantages of partnership

1 Unlimited liability. The personal assets of the owners can be attached by creditors. The partners are jointly and severally liable for the liabilities of the business.

2 Friction among partners may arise.

3 Each partner is an agent of the partnership and is liable for actions by other partners.

4 Instability of partnership firm if a partner decides to leave.

5 Difficulty in transferability of the business interest.