Introduction
The initial decisions in every business development play a pivotal role in determining the success of an organization. Several decisions are of great importance before starting any business. One of these factors is the structure of the business. There are several structures through which a business can operate. These include Sole Trader, Partnership, or a Company. Each of these categories has several legal restrictions, which guide its formation and running. Each of these structures has its unique legal requirements and liability limitations. Therefore, it’s necessary to consider all these factors before choosing the best depending on the prevailing factors, the nature of the business, or the intentions of starting a business. One needs to consider both advantages and disadvantages of each structure before making their final decisions.
For Simons, it will be advisable to consider these factors before choosing the type of business to enter into. These will help him in realizing his organizational goals and objectives. As already noted, there are several business structures that Simons can choose to run through. These are Sole Trader, Partnership, and Company business structures.
Sole Trader
One form of business structure in which Simons can choose to venture into is the sole trader system. This is one of the simplest business structures. This form of business is run by one individual who is responsible for the business control independently. The sole trader retains all the profits generated through the business. This is because he or she owns the business individually. However, a sole trader has unlimited financial and legal liability (Naidu & Rao 2009). However, the business is subject to the general law which directs the operations of business activities. It is associated with a minimum number of legal requirements compared to other structures. This form of business structure has limited liability implying that there is no sharing of debt; the sole trader is responsible for all the debts.
Insole trade ship, an individual provides all the necessary start-up fees needed to set up the business. In other words, there is no sharing of the losses among partners because the business is solely owned.
Advantages of Sole Trader
As already noted, sole trade ship is the business structure that involves only one person who is responsible for major business decisions. This business structure has several advantages compared to other business structures.
To start with, the sole trader gets all the profit generated in the business. Since this business is owned by one individual who is responsible for major decisions and all the losses, an individual is also entitled to all the profits. Therefore, there is no sharing of profits. One gets away with all the profits. This maximizes the share of the profits owned compared with other forms of business structures where the profit is shared among the partners or the shareholders.
Insole trade ship, the owner has full control of the business. There are no consultations before making critical decisions about the business. Therefore, the sole trader business is characterized by a very high level of efficiency in its operations. This implies that decision-making processes are faster compared to other forms of business structures where decision-making processes are usually slow due to disagreements on certain issues among the partners (Naidu & Rao 2009).). In this form of business, these complications are avoided. Therefore, decision-making processes are faster and hence most effective. The sole trader can also claim the expenses. This is unlike in the other forms of business structures.
Insole trade ship, the owner has a closer relationship with the customers. The owners can get into a closer relationship with the customers. This improves the level of business efficiency and performance.
Disadvantages of Sole Trader
Despite these advantages associated with the sole trade ship, it suffers some limitations. Simon needs to understand these limitations clearly before making his final decisions on the most feasible business structure. To start with, there is personality liability for the debt.
Another problem with the sole proprietorship is that it has a limited source of finance. Unlike in the case of partnership where there are several sources of finance, this form of business has limited financial sources. Only one person contributes to the start-up capital. There is no sharing of finance like in the case of partnership.
Sole trader business also suffers from the fact that only one individual is reliant. Only one individual is responsible for making critical decisions concerning the organization. This implies that decisions are delayed in case the owner is absent. For instance, in case the owner falls sick, many business operations are delayed. For example, when Simon was admitted to the hospital after an accident, the business missed several opportunities that are necessary for determining its success. This cost the business a great deal. In case it was a partnership, responsibilities are shared among the partners and therefore such opportunities can rarely be missed.
The owner of the business in the sole trader system is responsible for all the failures that may face the business. For instance, the owner will be liable for any injury of the customers or any other kind of loss associated with business operations. However, these problems are suppressed through insurance coverage.
Partnership
A partnership is a form of business structure where several people (partners) come together to make and share profits. A partnership business may be formed by professionals like accountants, doctors, or solicitors. Partners usually contribute capital through their loans. In partnership, there is personal liability for business debts. The creation of partnership business is regulated and governed by the partnership Act 1890 (Rush & Ottley 2006). Every business under partnership just ensures that it complies with the actin its operations. There are also personal liabilities for any business debt incurred in a business partnership (Rush & Ottley 2006).
Formation of Partnership
Informing the partnership business, the partners have to sign an agreement. This agreement is in a form of a contract that is governed by the law. This implies that every partner is expected to honor the contract. Any violation can lead to persecution in the court of law. The partners must agree on the name of the business, addresses as well as the capital investment of each partner. There must also be an agreement on how the profits are shared among the partners. These agreements are of great importance in reducing conflicts among the partners. The partnership must have at least two individuals. Every partner is not expected to compete with the firm without the consent of other partners.
Advantages of Partnership
One of the advantages related to the partnership form of business structure is that it has minimal administrative and legal procedure costs compared with the sole trade ship structure. The costs of starting up a partnership business are also very low. This is because the costs are shared among the partners. Each contributes a certain fraction unlike in the case of a sole trade ship where only one individual is fully liable for full contributions.
Since partnership is formed by several people, there is combined expertise. Unlike in sole trade ships, different people are involved in the management of the partnership. Each person can contribute in the areas they are best in. By so doing, people can concentrate on the areas in which they are best. Each partner can contribute to the business in various ways. This helps in reducing operational expenses associated with this form of business. Partners also can easily share ideas as well as management skills in business operations.
In the partnership, it is easier to overcome the problems associated with accidents, sickness, and any other form of disability compared with other business structures. Therefore, in case one partner is affected by any of these problems, the business is not adversely affected. Other partners can easily merge the responsibilities of the victims. Therefore, the business will not be affected significantly in case of disability, accident, or sickness of any partner.
In partnership, there are high chances for prospective employers to become business partners. In case this happens, the workers’ productivity is increased because they will be determined to work towards the realization of the organizational goals. This reduces operational costs while maximizing profits.
Since a partnership is made of several people, each partner can specialize in certain aspects in which they can perform best. This maximizes the overall performance of an organization.
Disadvantages of Partnership
One of the main disadvantages of the partnership is that there is a high chance of disputes and mistrust among the partners (Residual rewards 2011). Disagreements among the partners lead to delays in making decisions. This slows the decision-making process.
In many cases, there are problems while admitting new partners into the business and also the retirement of the older ones. These conflicts threaten the performance of an organization because many activities are affected when such problems rises.
The partnership form of business structure is not a separate legal entity. Therefore, it requires all the partners to participate in many legal transactions. This may slow down business activities. For instance, it may take a long period to promote a certain activity in case one partner is not available.
Since the business is collectively owned in the case of a partnership, individuals are sometimes liable for the actions of other partners. In case one partner makes a decision that dips the business into losses, other partners are forced to get a share of such losses yet they did not contribute in any way.
In some cases, the life of a partnership may be limited. For instance, in case of withdrawal or death of one of the partners, the wellbeing of the company may be threatened. In addition, an individual is forced to be flexible in the partnership form of business structure. Partners are expected to consult each other and negotiate because decisions can never be made individually. In this case, the shareholders can only be liable to a debt amounting to the amount they have contributed to the business and nothing more to that.
Company
A limited company can be viewed as a company whose liability is limited. In other words, the entrepreneurs are free to keep their assets and finances separate from their business itself (Adrian 2010).
The law permits people to have an artificial legal person that usually has a legal personality, which separates from its members. Some legal processes must be followed in the formation of a company. The company must comply with the company’s act before it’s fully permitted to operate.
All the registered companies are expected to comply with the company’s act. This ensures that the company follows certain requirements before it begins to operate. For instance, the company must be financially viable. This ensures that the company has higher chances of succeeding after development. Registration of the company also allows the potential investors to inspect the company’s information before making their final decisions.
Advantages of a Company
One of the main advantages of a company is that it has limited liability. Therefore, this guarantees financial security to its shareholders. For instance, the shareholders can only be liable for the debt amounting to the level of their investments. This makes the shareholders feel secure in the company.
A limited company is a separate entity from its owners. This is of great importance because the company will continue to exist beyond the lives of its members. Therefore, the company has a likelihood of long existence. For instance, in case some of its members die or retire, the company will continue to exist. Therefore, there is maximum security for employees, and therefore experienced employees are retained.
Another advantage of a limited company lies in the fact that the company is only taxed on its profits (Tutor2 2011). This is unlike the case of a partnership or sole traders who are entitled to personal tax.
Disadvantages of a Company
One of the disadvantages of the limited company is the complexity of its accounts. There is a complex rule that governs bookkeeping and accounts in a limited company. For instance, companies are required to keep their accounts in double-entry formats as well as balance sheets and other necessary notes (Adrian 2010). These operations may be too expensive for the company.
Companies also have restrictions on raising capital. For instance, the company is restricted in raising capital through the sale of shares. This may pose a major problem especially when the company is in financial difficulties.
Another major problem that faces many companies is the dilution of powers. In some cases, disputes arise among the leaders on which are the best ways forward. This is caused by differing ideas among the leaders. When the company decides to increase its capital through the sale of shares, a conflict may intensify as more people enter into the company with differing views.
Discussion
From the above discussion, it is clear that there is a need to consider several factors associated with each business structure before deciding on the best form of business structure to venture into. In this case, Simon has decided to start up a business where he can have somebody to support him in raising finance and also a person with whom they can share responsibilities. He also doesn’t want to risk more than his initial investment. In addition, he also needs to keep the business dealings private. Therefore, he needs to consider a business structure that satisfies his needs or preferences.
In this case, it would be advisable for Simon to consider a partnership. This is because he will be able to share responsibilities, share the start-up capital, share losses, and also enjoy other benefits associated with a partnership business structure.
References
Adrian. 2010. Advantages and Disadvantages of Partnership. Web.
Naidu, N. and Rao, K. 2009. Management and Entrepreneurship. New Delhi, I. K. International Pvt Ltd.
Residual Rewards. 2011. Business Partnerships Advantages and Disadvantages. Web.
Rush, J. & Ottley, M. 2006. Business Law. London, Cengage.
Tutor2. 2011. Advantages of limited liability for a company. Web.
