Introduction to Business Administration Slide 4

Introduction to Business Administration

Session 4 – Different forms of business ownership

1. Choosing a form of Business ownership
•The decision can be complex and have far reaching consequences for owners, employees and customers.
•Selecting the right ownership involves knowing your long-term goals and how you plan to achieve them.
•Your choice also depends on your desire for ownership and your tolerance for risk.

2. Sole Proprietorship
•The simplest form of business entity is the sole proprietorship.
•If you operate as a sole proprietor, you and your business are legally inseparable.
•You can continue to operate as a sole proprietor as long as you are the only owner of the business.

Advantages

•Registration is inexpensive, simple and uncomplicated. There is no need to draft a partnership agreement or to go to the extent of filling different registration forms at the Registrar-General’s Dept.
•You are unlikely to be sued;
•You may not need to start with much money;
• It may be considered the most appropriate form of business entity to start with.
•The satisfaction of working for yourself.
•You keep all the after tax profits.
•You don’t to reveal your plans or finances to anyone.

Disadvantages

•The owner is personally responsible for all debts.
•Sole proprietor is only possible when the business is owned by one person.
•A sole proprietor and business are considered to be the same legal entity for tax purposes.
•The business depends on the managerial skills of one person.
•The life of a sole proprietorship is limited.
•The difficulty of a single-person operation obtaining large loans.

3. Partnership
An association of two or more individuals, carrying on business jointly for the purpose of making profits. The incorporated Private Partnership Act, 1962, Act 152, governs this type of partnership.

Advantages
•Partnership dwells on pooling resources together. The right business partnership creates an arena for complimenting skills, knowledge and finance.
•The broad pool of talents tends to translate into innovative products and services.
•Partnership increases the chances that the business will endure.

Disadvantages

•A partner can be held responsible for another partner’s negligence.
•It has the potential for interpersonal problems.

4. Limited Liability
• A limited liability is a company having the liability of its members limited to the amount, if any, unpaid on the shares respectively held by them.

Advantages
•Individual members will not be personally liable for debts or other obligations of the company.
•The company can raise more capital by issuing more shares or debentures.
•It has greater borrowing power.
•Board of directors with expertise/experience can be appointed.
•Shareholders can sell/transfer their shares freely.

Disadvantages
•There is a loss of overall ownership.
•There is a loss of control of the business.
•Decisions take longer and there may be disagreement.
•Significant expenses are incurred when setting up the company.
•The personal touch may be lost.
•There are more statutory regulations to conform to.
•Profits are shared among greater number of people.
•Public disclosure of the financial affairs is necessary.

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