Componies

A business is an economic unit involved in the buying and selling of goods and services so as to satisfy the needs and wants of consumers profitably. Many factors and implications need to be taken into consideration before a business can be established, such as: the level of control the owner wishes to have over the business; tax implications of the business; expected profit (or loss) of the business. The different forms of business ownership are: sole trader; partnership; close corporation; companies. A business is an economic unit involved in the buying and selling of goods and services so as to satisfy the needs and wants of consumers profitably. Many factors and implications need to be taken into consideration before a business can be established, such as: the level of control the owner wishes to have over the business; tax implications of the business; expected profit (or loss) of the business. The different forms of business ownership are: sole trader; partnership; close corporation; companies. Business organizations Sole trading business Sole trader is a person who carries out the trade/ business single handily. He is the whole and soul of the business. Here are the features of a sole trader: 1. The business is owned or founded by one person. 2. The owner makes all the decisions in the business. 3. The owner obtains his/her capital sources and base from personal savings and from loans from friends and family. 4. The owner of a sole trader firm is responsible for all liabilities incurred by the business. This type of structure does not differentiate between the owner and the business. 5. All profits, expenses and losses belong to the owner. 6. Sole proprietors are not required to publish their annual statements but are however required to submit them to the Tax Office for income tax calculations. Advantages of a sole trader: * Control - Sole traders maintain full control of their business. Running it how they please without the interference of others. * Profit retention – Sole traders retain all the profits of their business. * Private data – Information about sole traders is kept private, unlike that of limited companies which is necessarily made public after registration with Companies House. * Specialist – Often a small business, sole traders can offer a more personal service with local roots and ties. This can be more appealing to potential customers in the local community. * Personal – Because there is no need to confer with other decision makers, sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers. Disadvantages of a sole trader: * Liability – sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets they have both in and outside of the business. * Finance – sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future. * Reverse economies of scale – sole traders will be unable to take advantage of economies of scale in the same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs. * Decision making – all decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person. Partnership 1. The business is owned by between 2-20 people. 2. Each partner has a say in the decision making process. 3. Profits and losses are shared between partners according to the agreed ratio. 4. Each partner contributes a part of the total capital. 5. A partnership agreement/deed of agreement has to be made. They also have to register with the Register and the Tax Office. 6. Partnerships are not required to publish their annual statements but are however required to submit these statements to the Tax office for income tax calculations as well as their personal profit share statements to have their income tax charged. Advantages of a partnership: * Capital – Due to the nature of the business, the partners will fund the business with start-up capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners. * Flexibility – A partnership is generally easier to form, manage and run. They are less strictly regulated than companies, in terms of the laws governing the formation and because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management, as long as all the partners can agree. * Shared Responsibility – Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills. So if one partner is good with figures, they might deal with the book keeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business. * Decision Making – Partners share the decision making and can help each other out when they need to. More partners mean more brains that can be picked for business ideas and for the solving of problems that the business encounters. Disadvantages of a partnership: * Disagreements – One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. * Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are fewer freedoms with regards to the management of the business. * Liability – Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. This can be off putting for some people. * Taxation – One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a Self-Assessment tax return each year. * Profit Sharing – Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards. Comparison between sole trader and partnership: Comparison | Sole trader | Partnership | Ownership | One owner | 2-20 owners | Control | Owner only | Shared amongst partners | Decision making | Owner | Shared amongst partners | Extent of liability | Unlimited | Unlimited | Profit and loss | For owner only | Shared according to an agreed ratio | Capital source and base | Very little capital -from personal savings and borrowing from friends and relatives | Greater capital as there are more contributions from partners | Legal requirements | Registration with the registrar of Business names and the Tax Office | A partnership agreement and registration with the Tax Office | Secrecy of statements | Not required to publish financial statements | Not required to publish financial statements | Incorporation | Unincorporated | Unincorporated | Companies A company is a business jointly owned by the people who have invested in it. It is a separate legal entity from its owners. Features: 1. There is a limit of two members but there is no upper limit to the number of shareholders. 2. Capital is divided into shares which can be of any monetary amount. 3. Shareholders must hold at least one share. 4. The shareholders are only liable for the debts of the company up to the amount they agree to pay for their shares. 5. Because it can have a large number of shareholders, whose liability is limited, a large amount of capital can be raised. 6. Profits are distributed in the form of dividends. 7. It is often not practical for all shareholders to take part in the running of the business, so it is managed by an elected Board of Directors. 8. A company is a separate legal entity so any legal action is taken against the company, not the shareholders. Advantages of a private limited company: * Separate Legal Identity - A limited company has a legal existence separate from management and its shareholders. * Members' liability is limited * Protection of Company Name - The choice of company names is restricted and, providing a chosen name complies with the rules, no-one else can use it. * Continuity - Once formed, a company has everlasting life. Directors, management and employees act as agent of the company. If they leave, retire, die - the company remains in existence. A company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies. * Better Pension Schemes - Approved company pension schemes usually provide better benefits than those paid under contracts to self-employed sole trading businesses. * Taxation - Companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax-deductible costs that can be offset against a company's profits. In addition, the current level of Corporation Tax is lower than income tax rates. Disadvantages of a private limited company: * Smaller resources- A private company cannot have more than fifty members. Its credit standing is lower than that of a public company. Therefore, the financial and managerial resources of a private company are comparatively limited. * Lack of transferability of shares - There are restrictions on the transfer of shares in a private company. As a result a shareholder cannot leave a private company easily and quickly. * Limited liabilities – Expansion and growth is limited due to the limit for the maximum shareholders. * No valuation of investment - Shares of a private company is not listed on stock ex­change. There are no regular dealings in these shares. A shareholder cannot, therefore, know the real value of his investment in a private company. * Lack of public confidence - Public has little confidence in a private company because its affairs are unknown and it is not subject to strict control under the law. Advantages of a public limited company: * Limited liability – shareholders are not liable to the business debts even if it goes bankrupt, they will only lose up to the amount they invested and not more. * Transfer of shares – there is freedom to buy, sell and transfer shares as shareholders please. Disadvantages of a public limited company: * Profit-sharing - If the firm is sitting on a highly successful venture; future success (and profit) has to be shared with outsiders. * Loss of Confidentiality - A major reason why firms resist going public is the loss of confidentiality in company operations and policies. For example, a company could be destroyed if the company were to disclose its technology or profitability to its competitors. * Reporting and Fiduciary Responsibilities - Public companies must continuously file reports with the SEC and the exchange they list on. This disclosure costs money and provides information to competitors. * Loss of Control - Outsiders are often in a position to take control of corporate management and might even fire the entrepreneur/company founder. * Liability - The company, its management, and other participants may be subject to liability for false or misleading statements and omissions in the registration documents or in the reports filed by the company after it becomes public. In addition management may be subject to law suits by the stockholders for breaches of fiduciary duty, self-dealing and other claims, whether or not true. Close corporations 1. They are limited to a maximum of ten members. 2. The members are also the managers of the business and they also control the business. 3. Audited financial statements are not required. 4. The legal procedures for registration and administration of closed corporation are kept relatively simple. 5. The close corporation can continue as a going concern even if new members are introduced or existing members leave. Advantages of a close corporation: * Affordable - Registering a Close Corporation is a simple and relatively affordable option. It is not expensive and there are only a few regulations. * Liability - Owners' personal assets are protected from business debt and liability. * Fringe benefits - Tax free benefits such as insurance, travel, and retirement plan deductions. Disadvantages of a close corporation: * More expensive to form than proprietorship or partnerships * More legal formality * More state and federal rules and regulations * The number of members allowed in a Close Corporation is 10. This could limit and hamper the growth and expansion of the business. Comparison | Company | Close corporation | Ownership | 2-50(private) 2-infinity shareholders depending on available shares (public) | Maximum of 10 members | Control | Board of directors | Shared amongst members | Decision making | For ordinary shareholders they are allowed to cast one vote per vote | Members elect management | Extent of liability | Limited | Limited | Profit and losses | Paid out in form of dividends in good years | Shared amongst members | Internal auditors | May or may not have one | May or may not have one | Legal requirements | Memorandum of association\ Articles of association | Founding statement sent to the registrar of companies | Secrecy of statements | Required to publish financial statements | Required to publish financial statements | Incorporation | Incorporated | Incorporated | Best business organization: A partnership would be the best option in my opinion. It is the best form of business because of its managerial flexibility, its quickness to set up and division of labour as well as income. A sole proprietorship is simply too strenuous to be run by an individual efficiently enough to expand the business and increase profits. A corporation and a company are too large to maintain and it is run by a board of strangers who haven’t been met or extensively researched. A partnership can be run efficiently when the partners trust each other and can. Then they can easily expand, advertise and increase profits. All the partners take part in the decision making and responsibility is shared amongst the partners.