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Introduction To Business Management Lesson 3

This document contains a marking key for an assignment on business structures in an Introduction to Business Management course. It defines and compares the key characteristics, advantages, and disadvantages of sole proprietorships, partnerships, and corporations. Sole proprietorships are easy to form but provide unlimited liability, while corporations provide limited liability but are more expensive to set up and operate due to regulatory requirements. Partnerships fall in the middle, providing some access to capital and synergy between owners but also potential conflicts.

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William Mushonga
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50 views

Introduction To Business Management Lesson 3

This document contains a marking key for an assignment on business structures in an Introduction to Business Management course. It defines and compares the key characteristics, advantages, and disadvantages of sole proprietorships, partnerships, and corporations. Sole proprietorships are easy to form but provide unlimited liability, while corporations provide limited liability but are more expensive to set up and operate due to regulatory requirements. Partnerships fall in the middle, providing some access to capital and synergy between owners but also potential conflicts.

Uploaded by

William Mushonga
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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INTERNATIONAL TRAINING COLLEGE - LINGUA

Towards Educational Excellence


NCHE Reg. No: R0014
NQA Accreditation No: 000095

DEPARTMENT OF BUSINESS AND MANAGEMENT

MARKING KEY: ASSIGNMENT 2

Lecturer: MR W. MUSHONGA Due Date: 7 MAY 2020

QUALIFICATION : Diploma in Accounting & Finance (NQF Level 3)

: Diploma in Business Administration (NQF Level 3)

: Diploma in Human Resources Management (NQF Level 3)

: Diploma in Office Administration (NQF Level 3)

MODULE : Introduction to Business Management (NQF 3)

ASSIGNMENT : 2

TOTAL MARKS: 30 marks

QUESTION ONE

It is important that the business owner seriously considers the different forms of business
organization—types such as sole proprietorship, partnership, and corporation. Which
organizational form is most appropriate can be influenced by tax issues, legal issues, financial
concerns, and personal concerns. Distinguish between the following business structures in
terms of their characteristics as well as their advantages and disadvantages.

[30 marks]

Sole Proprietorship

A Sole Proprietorship consists of one individual doing business. Sole Proprietorships are the
most numerous form of business organization in Namibia, however, they account for little in
the way of aggregate business receipts.

Advantages

• Ease of formation and dissolution. Establishing a sole proprietorship can be as simple


as printing up business cards or hanging a sign announcing the business. Taking work

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as a contract carpenter or freelance photographer, for example, can establish a sole
proprietorship. Likewise, a sole proprietorship is equally easy to dissolve.
• Typically, there are low start-up costs and low operational overhead.
• Ownership of all profits.
• Sole Proprietorships are typically subject to fewer regulations.
• No corporate income taxes. Any income realized by a sole proprietorship is declared on
the owner’s individual income tax return.
Disadvantages

• Unlimited liability. Owners who organize their business as a sole proprietorship are
personally responsible for the obligations of the business, including actions of any
employee representing the business.
• Limited life. In most cases, if a business owner dies, the business dies as well.
• It may be difficult for an individual to raise capital. It’s common for funding to be in the
form of personal savings or personal loans.
The most daunting disadvantage of organizing as a sole proprietorship is the aspect of
unlimited liability. An advantage of a sole proprietorship is filing taxes as an individual rather
than paying corporate tax rates. Some hybrid forms of business organization may be
employed to take advantage of limited liability and lower tax rates for those businesses that
meet the requirements.

Partnership

A Partnership consists of two or more individuals in business together. Partnerships may be as


small as mom and pop type operations, or as large as some of the big legal or accounting
firms that may have dozens of partners. There are different types of partnerships—general
partnership, limited partnership, and limited liability partnership—the basic differences
stemming around the degree of personal liability and management control.

Advantages

• Synergy. There is clear potential for the enhancement of value resulting from two or
more individuals combining strengths.
• Partnerships are relatively easy to form; however, considerable thought should be put
into developing a partnership agreement at the point of formation.
• Partnerships may be subject to fewer regulations than corporations.
• There is stronger potential of access to greater amounts of capital.
• No corporate income taxes. Partnerships declare income by filing a partnership income
tax return. Yet the partnership pays no taxes when this partnership tax return is filed.
Rather, the individual partners declare their pro-rata share of the net income of the
partnership on their individual income tax returns and pay taxes at the individual income
tax rate.
Disadvantages

• Unlimited liability. General partners are individually responsible for the obligations of the
business, creating personal risk.
• Limited life. A partnership may end upon the withdrawal or death of a partner.
• There is a real possibility of disputes or conflicts between partners which could lead to
dissolving the partnership. This scenario enforces the need of a partnership agreement.

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As pointed out, unlimited liability exists for partnerships just as for sole proprietorships. One
way to alleviate this risk is through Limited Liability Partnerships (LLP’s). As with LLC’s, LLP’s
may offer some tax advantages while providing some risk protection for owners.

Corporation

Corporations are probably the dominant form of business organization in Namibia. Although
fewer in number, corporations account for the lion’s share of aggregate business receipts in
the U.S. economy. A corporation is a legal entity doing business, and is distinct from the
individuals within the entity. Public corporations are owned by shareholders who elect a board
of directors to oversee primary responsibilities. Along with standard, for-profit corporations,
there are charitable, not-for-profit corporations.

Advantages

• Unlimited commercial life. The corporation is an entity of its own and does not dissolve
when ownership changes.
• Greater flexibility in raising capital through the sale of stock.
• Ease of transferring ownership by selling stock.
• Limited liability. This limited liability is probably the biggest advantage to organizing as a
corporation. Individual owners in corporations have limits on their personal liability.
Even if a corporation is sued for billions of dollars, individual shareholder’s liability is
generally limited to the value of their own stock in the corporation.
Disadvantages

• Regulatory restrictions. Corporations are typically more closely monitored by


governmental agencies, including federal, state, and local. Complying with regulations
can be costly.
• Higher organizational and operational costs. Corporations have to file articles of
incorporation with the appropriate state authorities. These legal and clerical expenses,
along with other recurring operational expenses, can contribute to budgetary
challenges.
• Double taxation. The possibility of double taxation arises when companies declare and
pay taxes on the net income of the corporation, which they pay through their corporate
income tax returns. If the corporation also pays out dividends to individual shareholders,
those shareholders must declare that dividend income as personal income and pay
taxes at the individual income tax rates. Thus, the possibility of double taxation.

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