MULTITECH BUSINESS SCHOOL

OWACHIGIU PROSPER

REG.NO. 2021-BU-4697

COURSE: BACHELORS OF SCIENCE IN

COMPUTER SCIENCE

COURSE UINIT: FINANCIAL

ACCOUNTING
In legal terminology, sole proprietorships and partnerships are categorized as unincorporated
entities while private companies limited by shares or guarantee, public limited companies,
unlimited companies, statutory corporations and branches of foreign legal entities are classified
as corporate entities.

Unincorporated structures

Unincorporated structures are business entities without distinct legal standing from the owners
who remain individually accountable for the debts and obligations of the enterprise.

They include sole proprietorships and partnerships.

A sole proprietorship is a one individual entity. An individual carrying on business under a

business name not consisting of his/her true name must register this business name at the
Uganda Registration Services Bureau (URSB).

A sole proprietorship is easy to establish and the owner exclusively enjoys the rewards of the
enterprise. The owner is, however, not distinct from the business and is accountable individually
for any liabilities of the enterprise taxes inclusive.

Partnerships enable like-minded individuals not exceeding 20 in number to jointly raise capital
and undertake business together. They are widely used by professional service providers such
as lawyers and auditors.

Partnerships are governed by a partnership deed spelling out the rights and obligations of the
partners.

The registration of the partnership business name is mandatory if the name does not consist of
the true surnames of all partners. Partnerships are divided into two namely general and limited
liability partnerships (“LLPs”).
How LLPs differ from general partnerships is that the liability of the limited partners for any
debts or obligations of the partnership does not exceed the amount of their capital contribution.

In a general partnership, every partner is an agent of the firm and binds the other partners.
Therefore, all partners are also jointly and severally liable for the partnership debts.

A general partnership is also dissolved by the death or bankruptcy or retirement of one of the
partners unless the partnership agreement prescribes otherwise which not the same case is for
LLPs.

Corporate structures

Corporate business entities have a distinct legal standing from the owners who are generally
protected from the liabilities of the enterprise. These include locally incorporated companies,
statutory corporation and branches of foreign legal entities.

Local companies incorporated under the provisions of Uganda’s Companies Act, can have
limited or unlimited liabilities. Private companies limited by shares are those entities whose
membership by law is limited to 100 persons. Members’ liability for company obligations is
limited to their shareholding.

The right to transfer shares is restricted for private companies so is the subscription for
company shares and debentures by the public.

A private company limited by guarantee predominates non-profit organizations such as

charities, sports clubs and professional bodies. The purest form of a guarantee company is one
having the liability of its members limited by the memorandum to the amount that the members
undertake to contribute to the assets of the company if it is wound up.

Public limited companies are entities which are not private limited companies. They can offer
their shares to the general public but also have limited liability. The shares can be acquired
during an initial public offering or through trading on the stock exchange.

Unlimited companies are private companies where the shareholders have unlimited liability.
Each member is jointly and severally liable for the debts of the company in the event of winding
up. It is fairly easy to return capital to shareholders as the restrictions on the reduction of capital
in the Companies Act 2012 only apply to limited companies.

Statutory corporations or public corporations are public bodies established by respective Acts of
Parliament. Statutory corporations are managed by a Board of Directors appointed by the
government through the line minister or the President and are accountable to the public and
Parliament.

Foreign companies or branches registered in Uganda are an extension of their head office. To
be registered by URSB, branches must present the constitutional documents of their head
office.

Choice of business entity

The choice of entity for business is influenced by the legal, tax and commercial considerations
though in some cases the law is specific on the type of structure for regulated businesses.

Unincorporated entities are often less onerous to establish but are not separate from the owners
who remain individually liable for the debts and other obligations of the business.

Corporate entities are on the other hand separate legal entities distinct from their owners and
are liable for own debts and obligations. They can sue or be sued in their own right. Corporate
entities can also outlive their founders unlike unincorporated structures that usually cease with
the owner’s demise.

Sole Proprietorship

A sole proprietorship is the common business structure. It makes sense if you're in a business
where personal liability is not a concern. From a legal standpoint, the owner and the
proprietorship are the same.

Advantages
It's the easiest to set up because it doesn't require the filing of any papers.

States do not require the registration of proprietorships.

Profits are only taxed once on the owner's personal tax returns.

The owner has complete control of the business and makes all the decisions.

Tax forms are not complicated.

Assets are easy to liquidate upon the death of owner.

Disadvantages

The owner is exposed to unlimited legal liabilities. If you lose a lawsuit, you could lose your
home, car and other personal assets.

Proprietorships cannot accept capital from outside investors.

Borrowing money is more difficult. Banks are reluctant to make business loans to sole
proprietorships. You will have to rely on savings, home equity loans or loans from family
members.

Business will be liquidated when owner passes away.

But, what if your business has more than one owner? A partnership could work in this case.

Partnerships

A partnership is a sole proprietorship that allows the business to have more than one owner.

Advantages

They're easy to form.

A partnership can bring together a group of individuals with different talents to share in the
responsibilities of running a business.

If the partnership agreement permits, a partnership could continue to exist if one of the partners
dies.
Disadvantages

Partners are exposed to unlimited liabilities.

Owners will not always agree on decisions. This could lead to management conflicts.

Partners share in the profits of the business, but will not always feel they are being adequately
compensated for their contributions and services.

Limited Liability Companies

Advantages

The owners have limited liability. The owner's personal assets are protected from judgments
and defaults on company debts.

Owners can choose how the business pay taxes. It could be a proprietorship, a partnership or a
corporation.

An LLC is not required to have a board of directors.

The number of shareholders is unlimited.

Disadvantages

Legal and accounting costs are higher than proprietorships.

LLCs must file articles of incorporation.

Owners must create an operating agreement that defines management authority and limits to
making decisions.

In some cases, an LLC will cease to exist upon the death of a member, unless otherwise
specified in the operating agreement.

Suppose your business is growing and you need to attract more lender and investors. A C
Corporation may be necessary.
Advantages of Corporations

Before converting his business into a corporation, Sam wants to be clear on what will he gain by
setting up a separate legal entity. The biggest advantages of having a corporation which Sam could
list down are:

Limited Liability

In a corporation, the owners of the company are only liable for the amount of money which they have
invested through purchasing shares. This means that if the company goes bankrupt and has no
money left to pay back the creditors and lenders, the money invested by its shareholders into the
company (by purchasing its shares) will be used to pay back the creditors and lenders. Hence, the
shareholders will lose the amount invested. Creditors and lenders, however, have no claim on the
personal properties and assets of the owners. This is what limited liability means: limited up to the
extent of the amount invested.

Easy Availability of Capital

In a corporation form of business organization, it is relatively easy to raise huge sums of capital
through the public. Since the total money a company wishes to raise is divided into thousands and
lakhs of shares, the price of each share comes out to be very small. A small price allows a number
of people to purchase the shares of the company. Hence, it becomes easy to raise a big amount for
a corporation by dividing it into smaller units.

Corporations have Perpetual Existence

Another advantage of a corporation is that they continue to exist beyond the deaths of the Board of
Directors, the executives, and the managers. Its life can come to an end only when the Board of
Directors and the Executive team decide to do so. Hence, investors don’t have to worry about an
unexpected death or illness of the executives and managers, somebody else will come and take
their place. This also allows the managers to plan for the long term and do better.

Easy Transfer of Ownership

Ownership in a corporation is typically easy to transfer. In the case of a public company, the shares
(instruments of ownership) are freely transferrable. In the case of a private company however, it is
comparatively difficult to transfer shares as there are some restrictions.

Builds Credibility
A corporate form of business organization is considered more stable than other forms of business
organization. Also, when you set-up a corporation, you can attract top talent in the market to grow
your business rapidly. Hence, a corporation conveys the credibility of your business to suppliers,
customers are other stakeholders of the business.

Disadvantages of Corporations

There are certain disadvantages of setting up a corporation that include

Complex Process

Setting up a corporation is a very complex process. It takes heavy paperwork to set up a corporate.
The owners have to take lots of permissions from different regulatory authorities. Also, many norms
of different regulatory bodies that a corporate must fulfill before it can start its business.

Double Tax

The corporation has to pay a flat Corporate Tax on its profits. And then the dividends received by the
shareholders are taxed in their hands. This makes it less attractive for business owners to set up a
corporation.

Conflict of Interests

Sometimes, it happens that the Board of Directors and the executives may fulfill their personal
interests by taking certain decisions. These decisions may not be good for the health of the
corporation. For e.g., they may decide to pay themselves higher salaries out of the profits, or, they
may purchase luxury offices for them with expensive facilities, etc. All these types of personally
beneficial decisions may harm the corporate and its image especially if the corporate is not making
good profits.

Corporations Lack Business Confidentiality

a corporation must provide shareholders with an annual report and various other reports. These
reports present data on sales volume, new assets, profits, debts, and many other qualitative as well
as quantitative information. Since these reports are available for the general public, the business
may end up disclosing his business strategies to his competitors.

Extensive Rules to Follow

There are many standards set by law on how corporations should govern themselves. For e.g.,
corporations must have a Board of Directors, hold meetings at regular intervals, keep certain records
and publish some documents and reports periodically. A small mistake of manipulation by any of the
top executives could penalize the corporate heavily. For e.g., if the accounts department forgets to
disclose a liability say, bank loan, the federal government may consider it as a fraud and penalize
the corporate. Due to this, the corporate may gain a bad.