a) Partnerships and limited liability companies present several similarities for business owners looking for the right company structure. Both have similar income distribution and tax-reporting formats, and both are simpler to set up and operate than a corporation. Despite their similarities, they have differences.
Required:
Identify and explain THREE fundamental differences between a company and a partnership. (6 marks)
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- Name – A partnership cannot use the word “limited” in its name.
- No separate legal personality – a partnership has no separate legal personality, separate from its partners/members of the partnership. However, a company does have a separate personality from its shareholders. A company owns its property, not the shareholders. Partners own the partnership property.
- Unlimited Personal Liability– a partnership has unlimited liability for all the debts of the firm whereas shareholders in a company have liability limited.
- Succession – when one partner dies, the partnership is dissolved unless the partnership agreement provides otherwise. However, a company has “perpetual succession”. Shareholders may die but the company continues until it is wound up.
- Management – a partnership is managed by the partners together – they are the shareholders, managers and workers. A company is managed by the directors not the shareholders.
- Shares – partners have a share in a partnership as agreed between them. A partner’s share cannot be transferred without the consent of the other partners. In reality there is not a substantial difference in the definition of a share between a company and a partnership. Size – a partnership can have between 2 and 20 partners, except solicitors and accountants. A private company can have more and a public company can have 7 or more shareholders.
- Regulation – a company has memorandum & Articles of Association and a partnership usually has a Partnership Agreement to regulate its affairs.
- Legislation – the Incorporated Partnership Act of 1952 Act 152 is the primary piece of law (legislation) which governs partnerships .Companies are governed by the Companies Acts 1963, Act 179 – to date.
- Taxation – it is often said that partnerships are tax-transparent. Tax is paid by the partners on the profits each partner makes at the usual income tax levels for an individual. A company, being a separate legal personality, pays corporation tax (currently at 25%) but in addition to this, the shareholders will pay tax on any dividends received from the company.
- Accounts – Partnerships are not required to file accounts in the Company records office. Companies must file accounts at the Company records office. Therefore while a lot of a company’s financial details are a matter of public record, Partnerships financial details are kept private. (Any 3)
b) Sole proprietorships are the smallest form of business organization, and also the most common in the country. However, while there are certain advantages (it is easier to set up a sole proprietorship than a limited liability company, for instance), there are numerous disadvantages.
Required:
State FOUR disadvantages of the sole proprietorship as a mode of business. (4 marks)
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- Liability: The business owner will be held directly responsible for any losses, debts, or violations coming from the business. For example if the business must pay any debts, these will be satisfied from the owner’s own personal funds. The owner could be sued for any unlawful acts committed by the employees. This is drastically different from corporations, wherein the members enjoy limited liability (i.e., they cannot be held liable for losses or violations)
- Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health insurance premiums for employees.
- Lack of “continuity”: The business does not continue if the owner becomes deceased or incapacitated, since they are treated as one and the same. Upon the owner’s death, the business is liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries. This can result in heavy tax consequences on beneficiaries due to inheritance taxes and estate taxes.
- Difficulty in raising capital: Since the initial funds are usually provided by the owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks or other money-generating investments like corporations do.