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A sole proprietorship involves a business model where a single person owns the business. In principle, a sole proprietorship is a form of self employment. The business owner is responsible for the all the business liabilities and obligations (Emerson, 2009). Creditors can claim against sole proprietors assets which can be personal property or business assets. The sole proprietor must raise the capital for the business, start and operate the enterprise, accept losses and profits including assumption of the business risks.
Advantages: It requires low capital to start a business, minimal regulation and the sole proprietor has control of the entire business decisions. The business owner does not share profits and has significantly higher tax advantages in contrast to other business models.
Disadvantages: The business has unlimited liability and faces significant difficulties in acquiring capital. A sole proprietorship does not have a name protection; therefore, the business owner is entirely responsible for all business aspects.
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Partnerships are formed when one, two or more people come together with the aim of starting a business. The business functions, capital contributions, share of profits and liabilities are prescribed in the partnership agreement. There are various forms of partnerships depending on factors, such as capital contributions or share of responsibilities (Emerson, 2009).
Advantages: it is easy to create a partnership since there is low start up costs. Partnerships are subject to significantly limited regulation, potential tax benefits and wide managerial base. Capital is easily acquired through individual contributions that when pooled together make significant capital for the business.
Disadvantages: partnerships have unlimited liability; therefore, in the event of a creditor’s claim, the partner’s personal property is subject to the claim. However, if the partner is a limited liability partner, only his/her share of the business is included in the claim. Partnerships have divisibility of labor, authority, and decision making; therefore, no one person has control of their decision since the partners must deliberate and authorize any action. Partnerships do not have name protection; they lack continuity and it is difficult to find partners.
Limited Liability Companies
Incorporation of a limited liability company is a significantly comprehensive process and requires legal and professional consultation before initiation. The incorporation of a company includes the declaration of the nature of the company’s business, articles of association and a memorandum of association (Emerson, 2009). The incorporation of a business requires filing of essential papers, payment of designated fees. This business model can be created by one or more people through the provisions of corporations Act which describes the shareholder rights, director’s responsibilities and the rights of other parties.
Advantages: incorporation entails the formation of a limited liability business that can be easily transferred to another owner. The business becomes separate legal entity form the owner; therefore, private assets of the owner cannot be used to settle liabilities. An incorporated business has continuity, and tax advantages.
Disadvantage: Incorporation is closely regulated and requires significant resources to manage and may involve various restrictions in the business’s charter. The shareholders may in extenuating circumstances be held liable for the company’s debts and liabilities; therefore, limited liability companies are closely regulated.
A corporation in inherently a legal person or entity that has rights, responsibilities, privileges and obligations; therefore, they are independent of the owners. A corporation is owned by shareholders and directed by the board of directors. These business models are required to comply with legal and regulatory requirements as provided by the law (Emerson, 2009). Corporations are subject to defined taxes, and profits can only be shared in the form of dividends to the respective share/stock holders.
Advantages: corporations are subject to limited liability; therefore, the owners are protected and capital is easily raised through the sale of shares. A corporation is going concern; therefore, the presence or absence of the owner has no impact on its continuity. In addition, a corporation has a distinct name that is legally recognized, and ownership of the business is transferable.
Disadvantages: it is significantly difficult to form a corporation given the numerous legal and regulatory requirements that must be adhered to for the formation of a corporation. The business may incur double taxations, therefore, reducing the profits available to shareholders. In addition, corporations are legally bound to hold shareholder meetings and keep records.
Most Relevant Form of Ownership for an Aggressive Firm
An aggressive firm should form a limited liability company since it is the optimal business model that guarantees such a firm maximum returns and protection in the event of risks (Watson, 2005). An aggressive firm may entail undertaking businesses that are significantly risky but of high returns; therefore, a limited liability company will restrict the liability of the business to the business assets in the event of a risk while ensuring taxation protection and maximum returns in terms of profits.
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