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For answering this question it is enough to describe the advantages of a proprietorship and limited liability companies. The partnership companies lies somewhere between these other two types of business organization and combines their advantages and disadvantages.
A sole proprietorship business is completely owned and managed by one person. This is the oldest and most common form of business organization. This type of organization is most suitable for small businesses, and where the nature of business is simple.
A partnership firm is owned and managed by by more than one persons. The relationship between the partners of the firm and the liabilities of each of the partnership are defined by law in most of the countries. The partners contribute to the capital of the firm, and share the responsibility for operating the business and take on all the liabilities of the business.
Limited liability companies, also called joint stock companies is a voluntary association of people who contribute capital to start and operate a company. But the contribution to the capital for the firm is separated from the management of the firm. The company exists independently of the people who become its part owners by contributing to the capital of the company by buying shares of the company. Also the shareholders do not have any liability for the business beyond the sum they have invested by way of purchase of shares. The company is managed by an independent set of people, jointly called board of directors, who are elected by the shareholders. The formation and conduct of the joint stock companies is substantially regulated by well defined laws in most of the countries.
Advantages of Sole Proprietorship Companies.
- This form of business is very easy to form and wind up as there are no special legal procedures completed or agreements between more than one person to be reached.
- The owner or proprietor of the business, who manages the business, has maximum motivation for the success of the business as he or she is directly and fully affected by the gains and losses of the business.
- The business decision are quick and prompt as the proprietor is not obliged to consult anyone else or get the approval of anyone else for his or her business decisions.
- Freedom of decision making also makes the business more flexible. The proprietor is free to change any aspect of the business any time as he or she thins appropriate.
- The proprietor of the business has full control over all the activities of the business.
- It is easy to maintain the secrecy of the confidential information as the proprietor is not obliged to share such information with any one.
- The proprietor is able to maintain close personal relationship with all persons connected with the business.
Advantages of Limited Liability Companies
- Biggest advantage of limited liability companies is that it is possible to obtain large financial resources for running the business.
- Similarly joint stock companies are in better position to attract and employ professionals to operate and manage the company.
- Higher financial resources and professional management, as well as legal regulation and existence independent of shareholders, enable them to engage in large scale and geographically operations.
- The shareholders have limited liability. Even if the company make huge losses that exceed the share capital of the company, the shareholders liability is limited to their contribution or share of the share capital.
The advantages of sole proprietorship as a business form include: ease of establishment, no required business taxes, and sole control of business decision-making. Sole proprietorships are easier to establish than a partnership, which requires legal partnership agreements to be drawn up, or a corporation, which requires an expensive and lengthy application for a government charter of incorportation. Sole proprietors only pay personal income taxes on the profits of the business, the business itself is not responsible for paying any taxes. Finally, the sole proprietor makes all the business decisions for himself/herself, without potential conflict with a partner or board of directors.
The chief advantages of a partnership include: ease of raising capital, the ability to attract quality employees, and no required business taxes. It is easier for a partnership to raise financial capital because partners represent a smaller risk than a sole proprietor. If one partner defaults on a business loan, the bank can still collect from the other partner(s). The possibility of "making partner," or being offered part ownership in the business as a reward for hard work, is an incentive that partnership can offer that sole proprietorships often cannot. For this reason, partnerships can often attract more quality employess. Finally, like sole proprietorships, partners only have to pay personal income taxes on their share of the profits. The business is not liable for business taxes as a corporation would be.
A limited liability company (LLC) is a hybrid of a sole proprietorship or partnership, and a corporation. While enjoying the advantage of not having to pay business taxes like a corporation, the owners of an LLC are not liable for "the acts and debts" of the business. This addresses a major disadvantage of sole proprietorships and partnerships, unlimited liabilty, which means that the owners are personally liable for judgements against the business.
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