Question Business Form of Ownership Normally the ownership of a business can be arranged in three different ways, ly sole proprietorship, partnership, or a company. Each organizational structure has its own merits and demerits. In order to select an optimum style of business ownership, the comparative features of each types of business organization are discussed as under. Cost- benefit analysis Organizing a proprietorship is virtually costless as compared to partnership firm or a company. Constitutional document like partnership deed or memorandum and articles of association is not required for its creation. No registration fee is payable unless the selected trade is legally restrictive and requires registration.
But such registration is common for all organizational styles. On the other hand “partnerships are created by express or implied agreement. Oral agreements are permitted, although written agreements are preferred. ”(Robert W. Emerson, page 308)i. A company is the costliest of the three being a separate legal entity needing various documents and registration with company house for its creation. Creation of a partnership or incorporating a company include fee of professionals for preparation of constitutional documents like partnership deed or memorandum and articles of association, and also payment of registration fee with registrar or company house.
Though costless in its creation, a proprietorship is not considered as beneficial as other forms. This is because the shared responsibility and liability enhances the scope of business expansion and faith of creditors. A shareholder of a company or a partner of a LLP has limited liability, whereas “the distinguishing feature of a sole proprietor and partnership is that of limited liability. ” (Bill Malcolm and others, page 117)ii Ability to additional funds Banks or other financial institutions prefer to finance a company in comparison with a proprietorship or a partnership organization.
The main reason is the perpetual existence of a company. Also a company is a legal entity separate from its members and can be independently sued by the creditors for the recovery of their dues. A partnership has no separate existence than its partners. Sole proprietorship is also not a separate legal entity. Profit sharing and the tax effect A company, being a separate legal entity, is taxed on its income separately than its members.
The shareholders or members have to pay tax on dividend they get from the company. So a company is doubly taxed on same income. The partnership is not taxed separately on its income. Its income is taxed in the hands of partners in accordance with agreed upon profit/ loss sharing ratio. There is no difference between a proprietor and his/ her proprietorship firm from the tax point of view. However, VAT is applicable to all forms of businesses as per the nature of trade and transactions.
Tenure The company has a perpetual existence, and is not affected by its members leaving or joining the company. This provides longevity to the organization and assurance to its creditors about recovery of their dues. Proprietorship can be wound up any time as per desire of the proprietor. Partnerships can also be dissolved any time in accordance with members’ agreement, even if those were created for a fixed period of time. Other factors A company enjoys all important traits like legal entity, perpetual existence, centralized management, and free transferability of interests.
Partnership and proprietorship are not legal entities and thus lack longevity of existence. There are sub types to the available partnership and company structures like LLP, S. Corporations, non- profit corporations etc. The basic features of these sub types remain the same, except for a LLP that combines the features of a company and a partnership at many of its facets. Keeping in view the above described characteristics of different organizational structures, it is considered that suggestion of Michael Robert of creation of a company is the preferable than the other forms of ownership.
Company has an edge in many aspects over other types of organizational structures. Word Count: 680 Question 2 Working Paper References: