Forms of Business Ownership
The perspective entrepreneurs need to identify the legal structure that will best suit the demands of the venture before deciding how to organize an operation for business. For establishing a business the most important task is to select a proper form of organization as the conduct of business, its control, acquisition of capital, extent of risk, distribution of profit, legal formalities, etc. all depend on the form of organization. The necessity for choosing a suitable form derives from changing tax laws, the availability of capital or fund, liability situations, and the complexity involved in formation of business. The most important forms of business organization are as follows:
- Sole Proprietorship
1. Sole Proprietorship
A sole proprietorship is owned by only one person. This is the most common form of business ownership. It can include small retail stores, mechanic services and even inventors or musicians seeking to sell their products online. It is fairly easy to establish a sole proprietorship, and the process of running them is fairly simple.
Advantages of Sole Proprietorships
i. Ease of starting and ending the business
ii. Being your own boss.
iii. Pride of ownership as sole proprietors have taken the risk and deserve the credit.
iv. Leaving a legacy behind for future generations.
v. Retention of company profit
vi. No special taxes
Disadvantages of Sole Proprietorships.
i. Unlimited liability is the responsibility of business owners for all of the debts of the business.
ii. Limited financial resources. funds available are limited to the funds that the sole owner can gather.
iii. Management difficulties. many owners are not skilled at record keeping.
iv. Overwhelming time commitment. the owner has no one with whom to share the burden.
v. Few fringe benefits. fringe benefits can add up to 30% of a worker’s income.
vi. Limited growth
vii. Limited life span. if the sole proprietor dies or leaves, the business ends.
A partnership is similar to sole proprietorship, except more than one person is involved. Two or more people come together to work at a given business and share in the profits (or losses) or that business. Like sole proprietorship, a partnership is relatively easy to set up and doesn’t have to pay the sort of taxes that larger corporations do. However, the partners themselves are responsible for business losses and liabilities, and partnerships founded on informal agreements may run into interpersonal problems when the company struggles.
Advantages of Partnerships
i. More financial resources. two or more people pool their money and credit.
ii. Shared management and pooled/ complementary knowledge. partners provide different skills and perspectives.
iii. Longer survival. partners are four times as likely to succeed as sole proprietorships.
iv. No special taxes.all profits of partners are taxed as personal income of the owners.
Disadvantages of Partnerships
i. Unlimited liability.
ii. Each general partner is liable for the debts of the firm, no matter who was responsible for causing those debts.
iii. You are liable for your partners’ mistakes as well as your own.
iv. Division of profits. sharing profits can cause conflicts.
v. Disagreements among partners.
vi. Disagreements can arise over division of authority, purchasing decisions, and so on.
vii. Because of such potential conflicts, all terms of partnership should be spelled out in writing to protect all parties.
viii. Difficult to terminate. for example: Who gets what and what happens next?
A company is a business, which is considered a separate entity from owner; even having the legal rights of a person.
Advantages of Corporations.
i. Limited liability.
Limited liability is probably the most significant advantage of corporations. Limited liability means that the owners of a business are responsible for losses only up to the amount they invest.
ii. More money for investment
To raise money, a corporation sells ownership (stock) to anyone interested or corporations can also raise money from investors through issuing bonds. Corporations may also find it easier to obtain loans.
Corporations have the size and resources to take advantage of opportunities anywhere in the world.
iv. Perpetual life
The death of one or more owners does not terminate the corporation.
v. Ease of ownership change i.e. selling stock changes ownership.
Disadvantages of corporations.
i. Extensive paperwork
A corporation must prove all its expenses and deductions are legitimate.A corporation must keep detailed records.
ii. Double taxation
Corporate income is taxed twice.The corporation pays tax on income before it can distribute to stockholders.The stockholders pay tax on the income they receive from the corporation.
iii. Two tax returns
A corporate owner must file both a corporate tax return and an individual tax return
iv. Initial cost.
Incorporation may cost thousands of dollars and involve expensive lawyers and accountants.
Franchising is a business arrangement in which the owner of a trademark, trade name, or copyright has licensed others to use it in selling goods or services. It can be sole proprietorship, partnership or company form.
Advantages of franchises:
i. Personal ownership
You are still your own boss, although you must follow the rules, regulations, and procedures of the franchise.
ii. An Established Business
A franchise offers the advantage of operating under the banner of an already established business. The ideas, the brand, the operating techniques and much more are already tried and tested and in place ready to be implemented again and again at a new location as each franchisee takes up the mantle.
iii. A Known Brand
Operating under the banner of a franchise allows a franchisee to take advantage of the previously established brand of the business. This means there will (in theory) be far less work (and cost) involved in trying to establish and build on the brand of the business. It will already be known and trusted by the market and therefore should produced a steady stream of brand-loyal customers.
Disadvantages of a Franchise
i. No Control
The first and most significant disadvantage of a franchise is the fact that the franchisee has no control of the business or how it is run (or very limited control). The rules of the business are already established and part of the franchise agreement. How the business operates is set out by the brand of the franchise and it is very rare that a new franchisee will be able to operate outside of these borders.
ii. Tied To Suppliers
Operating a business, you’d probably like to keep costs down. Finding the cheapest suppliers to minimise your overheads and maximise your profits. But being part of a franchise means you’ll be required to use the franchise supply network.
iii. Cut Of Your Profit
The franchisor will expect a cut of your profit. You do all the hard work and still have to pay them for the privilege of using their name (and support). When times are hard, this might mean a further reduction in already low profits and a struggle for your business.
Each form has its advantages and disadvantages. And the choice of form of business ownership will directly affect how much taxes owner have to pay and what business licenses and documents are required. In majority of cases and is perfectly acceptable that small businesses start as one form of ownership and changes to another with its growth. Entrepreneur is not bounded by their first choice of form of business. Entrepreneur can decide to hire help form a lawyer or an attorney who specializes in small businesses and will help an entrepreneur to choose a form of business ownership and ensure him about getting all the required permits and license