A sole proprietorship is a form of business ownership and management where one person has complete control. The owner typically operates the business alone, but may have employees known as workers. In this arrangement, the owner retains all profits and assumes full responsibility for any losses incurred by the enterprise. Consequently, a sole proprietorship carries unlimited liability for repaying debts owed by the company.
If a business incurs debts from a warranty claim, the individual will be responsible for those debts and any claims will be made against the individual’s personal assets. Additionally, sole proprietorships are subject to taxation under the personal tax system. Establishing a sole proprietorship is a simple process that may only require registering the business name. The owner has full autonomy in operating the business without answering to higher authorities. The business can be named after its owner or any other chosen name.
A sole proprietorship business usually requires less initial capital compared to other types of businesses including tailor shops, beauty salons, restaurants, launderettes, and mini markets.
On the contrary, a partnership involves multiple individuals or entities collaborating as partners in a business. While the partners typically manage the business operations, there might be a silent partner who contributes capital without participating in management.
Both partners in a partnership are personally liable for the business’s debts, putting their personal assets at risk if the business fails. To protect themselves, it is crucial for partners to have a legal agreement that covers decision-making, profit-sharing, dispute resolution, admitting new partners, buying out partners, and dissolving the partnership when needed. There are two primary types of partnerships: general and limited.
In a general partnership, all partners have unlimited liability. In a limited partnership, there is at least one partner with liability limited only to their investment and another partner with full liability. Examples of partnerships include law or accounting firms, medical or dental practices. There are various types of partners in a partnership:
- Ostensible Partner: They are active and known as a partner.
- Secret Partner: They are active but not known or held out as a partner.
- Dormant Partner: They are inactive and not known or held out as a partner.
- Silent Partner: They are inactive (but may be known to be a partner).
A nominal partner is someone who is not an actual partner according to the partnership agreement. Despite this, a nominal partner presents themselves as a partner and allows others to represent them as such, either by using their name or other means. A company is a distinct legal entity that is established under the Corporations Act 2001. Shareholders, who are the owners of the company, hold their ownership interests through shares. The separate legal status of the company has various consequences. Firstly, the company can independently engage in contracts, acquire debts, and fulfill tax obligations without involving its owners.
The owners of a company are only taxed on the profit they receive through salaries, bonuses, and dividends. They are not responsible for the company’s debts once they have fully paid for their shares. For example, if a company sells $1 shares with 60 cents due at application and the remaining 40 cents due in future installments, shareholders would only be liable for the outstanding 40 cents per share if the company fails. This is known as limited liability, which limits their responsibility to any unpaid amount on their shares.
A company, as a distinct legal entity, has the same rights, obligations, and responsibilities as an individual. It can purchase, own, and sell property in its own name through its agents. Moreover, it can engage in business activities by entering into contracts with others. In a court of law, a company has legal standing and can initiate or defend lawsuits. It is also legally responsible for its liabilities and must fulfill income tax obligations similar to an individual. However, different types of business ownership have unique characteristics that set them apart from one another. What are these distinctions?
The main differences between these two types of business entities focus on tax considerations, liability, duration, ease of setup, and cost. Concerning taxes, a sole proprietorship necessitates the business owner to report all business income as their individual income on their personal tax return. This income is liable to taxation in the year it is received and permits deductions related to the business. Conversely, in a partnership, profits or losses can be distributed based on an agreed-upon ratio stated in the Partnership Agreement. Nevertheless, if no such agreement exists, profits must be divided equally among all partners.
Business deductions are claimed by the partnership prior to distributing income to partners, and partners claim these deductions on their personal tax returns. The company’s profits are first taxed at the corporate level, and then taxed again when distributed as dividends to shareholders, resulting in double taxation. The corporation itself does not receive a tax deduction when paying out dividends. Shareholders are unable to deduct any losses incurred by the corporation. In sole proprietorships, owners have unlimited liability and are personally responsible for all business debts, putting their personal and business assets at risk.
Partners in a partnership are responsible together for the business’s debts and can be personally held accountable for the entire amount owed, rather than it being divided equally. Additionally, partners can also be liable for their fellow partners’ actions during regular business operations. In contrast, owners of a company enjoy liability protection similar to that of a corporation due to the company’s separate entity status resembling that of a corporation. Unless they have signed a personal guarantee, members of the company cannot be individually held liable for debts. Ownership interests.
Unlike sole proprietorships or partnerships, companies have the ability to sell ownership interests to third parties without interrupting their ongoing operations. On the other hand, the duration of a sole proprietorship relies on the owner’s willingness and capability to continue running the business. If the owner passes away, the sole proprietorship comes to an end, and its assets and liabilities become part of the owner’s estate. However, a sole proprietor is free to transfer a business by selling all or some of its assets.
The termination of a business organization in partnership occurs when a partner dies, becomes incapacitated, withdraws, or goes bankrupt. However, if the Partnership Agreement specifies differently, this may not apply. In contrast, a company has perpetual existence and is not affected by the death or transfer of ownership interests of an owner or manager. Both sole proprietorship and partnership can be easily established and may use a trade name for marketing purposes. Nevertheless, it is necessary to register with the Registrar of Companies to establish a company.
Setting up and running a company is pricier when compared to a sole proprietorship or partnership. The increased expenses stem from the establishment of the company, encompassing initial formation fees, filing fees, and annual state fees. Nonetheless, these costs are somewhat offset by reduced insurance expenses. In terms of decision-making, a corporation may offer less flexibility than a partnership but still falls short of a sole proprietorship. This is because in a sole proprietorship, business needs can be swiftly tackled through everyday management decisions guided by laws and practical judgment.
Capital Rising: A corporation has multiple avenues for raising capital, such as selling stock. This includes the option to create different types of stocks, like preferred stock with distinct voting or profit attributes. On the other hand, partnerships face challenges in acquiring additional capital, although it is comparatively easier than for sole proprietorships. The reason being that sole proprietorships have a single owner and cannot sell shares to expand their business. Moreover, banks tend to exercise more caution when lending money to sole proprietorships. Nevertheless, sole proprietorships offer several advantages.
The sole proprietorship is a straightforward and cost-effective business structure to establish and terminate. Unlike other types of businesses, it doesn’t have distinct taxes for the company itself. Instead, the owner pays taxes on the business’s income as part of their personal income tax. The owner has full autonomy and decision-making power over every aspect of the business, enabling them to determine its direction, strategies, and policies. Additionally, they have the flexibility to sell or transfer the business according to their preferences. Furthermore, they maintain absolute control over the assets and finances of the business.
A sole proprietorship offers the owner the freedom to withdraw funds for personal use after ensuring that business bills are paid. This provides independence from government control and allows for full profit claiming. Nonetheless, there are disadvantages associated with being a sole proprietorship. As it is not recognized as a distinct legal entity, the owner bears unlimited liability in legal disputes, thus assuming personal responsibility for business debts and obligations.
Moreover, sole proprietorships are at risk of liabilities resulting from employee actions. This is due to the limitations in capabilities and knowledge that stem from the owner’s skills, time, and investment. Sole proprietorships have an uncertain business lifespan and can be greatly affected or terminated if the owner becomes ill or dies. On the other hand, partnerships provide numerous advantages. To begin with, partnerships are relatively easy to set up; however, it is essential to put effort into creating a partnership agreement.
Partnerships submit an informational tax return, with the income being reported and taxed on the partners’ personal income tax returns. This business structure brings together multiple individuals, pooling their skills, talents, and knowledge while giving all partners equal rights in managing the business. Nevertheless, partnerships come with a drawback of unlimited liability. This implies that partners bear full responsibility for all debts and obligations regardless of their degree of involvement.
The partnership form is limited in duration and may terminate due to death, incapacity, withdrawal, or bankruptcy of any partner. Many partnerships experience disputes stemming from disagreements over profit sharing or decision-making. Partnerships have limited financial resources and can only borrow money or utilize partners’ savings. They must be dissolved and reestablished to allow new partners to invest. Another drawback is known as mutual agency, where each partner acts as an agent for the partnership and all other partners.
Partnerships allow partners to act on behalf of others and hold them accountable within the business scope. Acquiring capital can be challenging for partnerships, especially for long-term financing compared to corporations. However, by leveraging personal assets, partnerships offer more opportunities than sole proprietorships. Establishing a corporation provides limited liability protection for owners since it is recognized as a separate legal entity.
Shareholders’ personal assets are not vulnerable to corporate debts or liabilities, making companies an appealing investment. The inherent stock structure of a corporation makes it enticing to investors, while also providing a lasting existence irrespective of owner or manager deaths or ownership transfers. Additionally, the taxation benefits of a company are advantageous, as owners are only taxed on profits received as salaries, bonuses, and dividends, while the company itself pays taxes at the applicable rate on any profits.
Companies have the option to generate significant capital through public share offerings. They possess a defined management structure. Shareholders, who are the company’s owners, elect a Board of Directors, who in turn elect the officers. Besides electing directors, shareholders do not engage in the company’s operations. There are various drawbacks to the company business structure. Firstly, establishing a company is costlier and more time-consuming. Additionally, companies are subject to monitoring by federal, state, and certain local agencies, leading to increased paperwork requirements for regulatory compliance.
Starting a business involves expensive costs, including fees for formation, filing, and annual state requirements. Additionally, businesses need to handle extensive paperwork to fulfill formalities. This includes maintaining separate bank accounts and records for the company apart from personal ones. The complexity of these procedures can lead to higher taxes overall. Specifically, C corporations may face double-tax consequences when they generate profits and distribute dividends to shareholders.
S corporations have the option to address this tax problem by revealing the identities of their corporate officers and directors. Although shareholder names are typically not required to be made public in many states, it is usually necessary to include the names and addresses of corporate officers and directors on various documents submitted to the Secretary of State. It is crucial to follow proper corporate procedures when setting up and running the company in order to fully capitalize on its status as a corporation. Conversely, I personally favor establishing a sole proprietorship due to its numerous advantages that make it an appropriate selection for initiating a business in Malaysia.
The most basic and widespread type of business ownership for small businesses is a sole proprietorship. Creating a sole proprietorship is simpler than forming partnerships or companies since it doesn’t involve any specific procedures or paperwork. Usually, only a few legal documents and minimal record keeping are needed. Additionally, a sole proprietorship can register a trade name to promote its goods and services. It’s important to note that sole proprietors are exempt from taxation.
When calculating taxable income, the organization’s income is combined with the owner’s personal income. Dissolving a sole proprietorship is simple because it involves only one person, making it easy for that individual to cease operations. Establishing a sole proprietorship is inexpensive compared to other business structures as there is no need for legal assistance or multiple fees. In contrast, starting a corporation involves higher costs. Therefore, initiating a sole proprietorship can be accomplished effortlessly with minimal capital requirements.
