Sole proprietorship form of business

Sole proprietorship refers to a form of business organization which is managed and run by one individual. It is simple and common because of its informal nature and the fact that it is less subject to the government regulations (Smith, 1776). It is worth noting that sole proprietorships cannot be separated from the owner because they are one and the same body, a feature that distinguishes sole proprietorship from the other forms of business organization and gives the owner full control over the business .The owner is held liable for the business debts and is responsible for lawful actions touching the business. All the debts and assets belong to him and therefore there is no legal division between the two. The sole proprietor should reflect his or her legal name in the business cards, email and in the trading license for recognition by the local authorities. In addition it is also a required that the sole proprietor reports all the business revenue and the expenses incurred on the personal tax return (Klein and coffee, 2002).  The sole proprietor can combine the business and their personal assets without restraint. Once the sole proprietor decides to sell the business, he/she ceases to remain the proprietor any more. Sole proprietorship requires less capital to form and less legal formalities such as certificate of incorporation, memorandum of articles, memorandum of association. It is easier to wind up the business since no long procedures are involved ,The sole proprietor can obtain assistance from family members in the running of the business .Sole proprietor enjoys profit alone contrary to partnership form of business where the partners share profits equally in accordance with the partnership deed. The owner gains a sense of pride because they have an enterprise they can call their own all things held constant.

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However sole proprietorship is faced with several challenges which in many cases limit its growth. One of the challenges is the fact that it has unlimited liability meaning if the sole proprietor is unable to clear their debts their own assets are sold to repay the debts. The business does not safeguard his personal assets like in corporations, (Acheson and Turner1998).  The business lacks pool of skilled expertise to manage and run because of its small size .Large businesses have high chances of attracting skilled managers because they are assured of job security and other benefits. Sole proprietorship lacks perpetual life since its continuity is terminated once the sole proprietor dies. It is also worth noting that sole proprietorship has limited sources of capital for expanding the business because they cannot either sell part of the business or invite the public to subscribe for its shares. Small entities like sole proprietorship suffer financial diseconomies of scale because they have few assets .Bigger farms are considered creditworthy because they have a big stock of assets that can act as security for borrowing loans. Banks and other financial institutions fear lending sole proprietors because they may go unpaid if the business experiences a loss or fails in the long run. Another challenge for sole proprietorship is that they bear loss alone unlike in partnership where losses are spread to all partners.

Partnership form of business

Partnership form of business is a relationship that subsists between two or more partners with an aim of carrying out business guided by the partnership agreement. Partners contribute to the business by combination of properties, expertise and share the earnings. A partnership agreement also known as partnership declaration demands that all partners indicate their signatures to show commitment and agreement to the terms and conditions. Contrary to corporations which pay corporate tax (incorporated), all earnings in partnership are appropriated to partners who are taxed individually. Basically there are two types of partnerships namely limited partnership and limited liability partnership. In limited partnership there are one or more general partners with unlimited liability and one or more partners with limited liability. A limited partner contributes finances for the partnership but is not engaged in the day to day running of the partnership while unlimited partners contribute finances and engage in the day to day running of the partnership. A limited liability partnership on the other is formed by a collection of professionals such as Doctors, Lawyers, Engineers and Accountants who work under certain federal legislation for example certified public accountants and engineering registration board (Hillman, 1997) can form a limited liability partnership.

A written partnership agreement is very critical irrespective of the type of partnership since it provides the partners with solutions of dealing with partnership issues even before they come up .An agreement smoothens the day to day activities of the business and prevent failure of partnership when an issue arise. Any successful partnership agreement comprises of the finances contributed by every partner to prevent memory risks in the future which may result into a crisis. Division of labor amongst the partners is very crucial before commencing partnership to ensure that every partner is aware of their day to day work. The question of what ensue when a partner dies ,become insane or disabled is addressed ,the agreement should  specify the treatment of such a partner .The solution can be written in a separate agreement known as buyout or can be fixed in the partnership agreement sections. Another question that should be addressed is when a certain partner needs to quit from partnership. In this case the buyout agreement should specify issues such as valuation of the goodwill, the amount they should be paid and the potential partner who can hire the leaving partner’s share in the partnership. What should happen during dissolution of the partnership should be put into writing in the agreement; how the earnings should be shared bearing in mind that some partners work hard than others and others contribute a larger amount during establishment of the partnership and therefore deserves a relatively higher share. In the partnership agreement, the partners should have ways of dealing with a conflict written; questions of who should resolve the conflict, how how it should be resolved and how fast it should be resolved so that it does not affect the overall performance of the partnership at any one time. The agreement should also specify how the accounting matters will be dealt with; whether the books of accounts will be kept in the central place of the business, who will be allowed to inspect them, who will be making purchases and sales on behalf of the partnership and whether accounting decisions can be made without the agreement and consent of every partner. Also addressed in the agreement are the assets or anything that a partner brings into the partnership whether tangible and intangible accompanied with a brief description .The agreement will specify what happens when a partner uses the partnership property such as withdrawal of money; how much can a partner be allowed to withdraw, how much interest he should pay on drawings. The question of what comprise income of the partnership will also be addressed; what interest will be paid ion partner’s capital, how much salary will be paid to certain partners and after how long ,the amount of earnings that will be reinvested to the partnership business.

A partnership agreement is very critical before starting the partnership to avoid taking each other to the court which is too expensive and time consuming on the part of partnership business. It is recommended that since the partnership agreement is so sensitive, it should be written in the presence of a lawyer to strengthen it and expound issues in a legal and in a more comprehensive way.

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Corporations form of business

A corporation can be defined as a legal entity that is established by an act of parliament or by the laws of a particular state. A corporation is separate body that can have a name and can sue in its name meaning it is separate from the people who formed it (Solomon v Solomon 1897) The law recognizes corporations as having similar rights enjoyed by the citizens though they are not natural human beings .It therefore means that can be accused of violating the rights of individuals and can be condemned for crimes such as corruption which see them being charged or suspended from operating. They can own property, enter into contracts, pay for its taxes and clear its debts when they are due in its capacity. Before commencing, a corporation must fill the Articles of incorporation which shows the legal name of the corporation, address of the main office of registration of the corporation, the purpose for the establishment of the corporation, the rights of the board of directors and the shareholders, The number of shares that the corporation is authorized to issue and their par value, names and addresses of individuals who will be appointed as the initial board of directors and the name and address of every incorporator. Once the articles of incorporation, the shareholders elect the board of directors using the all inclusive approach, the bylaws are given an approval regarding how the corporation will be managed and run, legal and financial matters are dealt with, stocks of shares are issued to the shareholders. The Board of directors elects the officers normally the chief executive, the vice president, secretary and the treasurer who are responsible for management of day to day activities of the corporation. Extensive consultations are done from renowned consultants in corporations affairs.

The legal personality of corporations allows the creditors to acquire the corporate assets during liquidation before the corporation shareholders and the employees. It limits the corporation members from withdrawing the corporate assets and prevents reproduction through standard contractual laws. Corporation members (shareholders) have limited liability (Acheson and Turner, 1998).  which means that their personal assets can not be claimed if the corporation fails to pay its debts. They cannot lose beyond their contributions as due or shares wealth. Limited liability also allows corporations to raise more funds for investment by inviting the public to subscribe for shares. Corporations have perpetual life unlike sole proprietorship which lacks continuity once the sole proprietor dies unless the state orders for dissolution when the corporation breaches the laws. Besides the influence of the corporation members, corporations can be partly under the control of their creditors such as financial institutions and the banks. In many cases these creditors strain for controlling the corporation after lending them finances such as a post in the board of directors. Shares in a corporation can be freely transferred ,since as a separate legal entity ,there is no limit as to people who own or fund the corporation at any one point in time except in corporations which possess the buy-sell accord which specify to whom shares can be sold or transferred.

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However corporations are faced with the challenge of double taxation (Blumberg, 1993) in its earnings. The law requires that the firm should pay income tax and after distribution of its earnings to the shareholders after every financial year in the form of dividends shareholders are also demanded to pay individual income tax on the dividends. In addition formation of a corporation is very procedural and involves many legal formalities that must be strictly followed. It is also costly especially paying for corporation fees; the fees for filing the articles of incorporation that must be paid to the state secretary, franchise tax prepayment for the first year of operation, fees to the government for recognition in the acts of parliament (Diagnam and Lowry, 2006) and the fees paid to the attorney. Corporations require a large stock of capital to start up and may not be convenient for people with limited resources. Corporations are also faced with the challenges of keeping the records of all the officers, the shareholders, the board of director, adjustments in the corporation members and all the records of interested parties .Since the public should have access to some of these records, they are subject to termination and in some cases loss of these records. Corporations are sometimes subjected to strict regulations which if complied with may lead to failure of the corporation. Such regulations include raising of capital and the selling of shares.