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Business Management - Assignment

Business Management - Assignment

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Business Management - Assignment
Business Management - Assignment

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Published by: HeavenlyPlanetEarth on May 12, 2008
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03/13/2013

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ASSIGNMENT

(a) Discuss the nature of a Sole proprietor, a partnership and a public listed incorporated limited liability company (corporation) in the light of the above statement

Sole proprietorship

A sole proprietorship, or simply proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in his or her own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to. Most sole proprietors will register a trade name or "Doing Business As". This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions.

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Advantages
An entrepreneur may opt for the sole proprietorship legal structure because no additional work must be done to start the business. In most cases, there are no legal formalities to forming or dissolving a business. A sole proprietor is not separate from the individual; what the business makes, so does the individual. At the same time, all of the individual's non-protected assets (e.g homestead or qualified retirement accounts) are at risk. There is not necessarily better control or business administration possible with a sole proprietorship, only increased risks. For example, a single member, member managed LLC still only has one owner, who can make decisions quickly without having to consult others, but has the advantage of limited liability. In the United States a sole proprietorship has the option of buying health care for self-employed persons, such as a Health Savings Account. Furthermore, in many jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. In the United States, for example, a sole proprietorship reports its income and deductions on a Schedule C on the individual's personal return. To the IRS, a single member LLC is treated as a disregarded entity, and thereby, the owner of a single member LLC will still report income and deductions on a Schedule C on their individual. In comparison, an identical small business operating as an S Corporation or partnership would be required to prepare and submit a separate tax return. As with all flow-through entities, all of the profits and losses from the business go right to the owner. A sole proprietorship often has the advantage of the least government regulations.

Disadvantages
A business organized as a trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is a sine qua non of bank financing. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, the proprietor is personally liable. The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.

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In countries without universal health care, such as United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue. Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company, or LLC. Note that such an LLC would still be treated as a sole proprietorship for income tax accounting purposes.

Partnership

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation

General partnership
In the commercial and legal parlance of most countries, a general partnership or simply a partnership, refers to an association of persons or an unincorporated company with the following major features:

Formed by two or more persons
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• •

The owners are all personally liable for any legal actions and debts the company may face Created by agreement, proof of existence and estoppel]

Partnership taxation
Partnership taxation is the concept of taxing a partnership business entity. Many jurisdictions regulate partnerships and the taxation thereof differently. Many common law jurisdictions apply a concept called "flow through taxation" to partnerships. Partnerships are a flow-through entity where the taxes are assessed at the entity level but which are applied to the partners of the partnership.

For an example

Hong Kong
Partnership taxation in Hong Kong is the taxation of the profits or losses generated by partnership business entities. First, these profits or losses of the partnership are assessed according to the Hong Kong Inland Revenue Ordinance, Chapter 112, section 22. After assessment, then said profits or losses flow through the partnership to the partners who are then taxed on their share of said profits or losses generated by the partnership without any taxes levied against the partnership.

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Limited Liability Company

What is a Limited Liability Company? A limited liability company (LLC):
• • • • •

is a type of business ownership combining several features of corporation and partnership structures is not a corporation or a partnership may be called a limited liability corporation, the correct terminology is limited liability company owners are called members not partners or shareholders number of members are unlimited and may be individuals, corporations, or other LLC's
Advantages of Limited Liability Company Limited Liability: Owners of a LLC have the liability protection of a corporation.

Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility. No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate. Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Generally, this will be a tax advantage, but circumstances can favor a corporate tax structure. Disadvantages of Limited Liability Company Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy. Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure.

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Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply. Setting-up a Limited Liability Company 1. Articles of Organization: If you plan to set up a limited liability company, you will have to file articles of organization with the Secretary of State and pay the required fees. Articles may be prepared by a lawyer or filed yourself. 2. Operating Agreement: Although it is not required in many states to draft an operating agreement, it is advisable. Much like corporate by-laws or partnership agreements, the operating agreement can help define your company profit sharing, ownership, responsibilities, and ownership changes.

(b)External environmental influence in business

External influences
Businesses operate in an external environment in which as well as competition from rivals businesses have to take account of legal, political, social and economic influences. A SLEPT(Social, Legal, Economic, Political, Technological) analysis is often carried out by business planners which enables them to develop more informed strategies (i.e. long term plans).

Social factors
Relate to change is society and social structures. Changes in the structure of the population, and in consumer lifestyles and behaviour affect buying patterns.

Legal factors
Relate to changes in laws and regulations. Businesses must be careful to keep within the law and to anticipate ways in which changes in laws will affect the way they must behave.

Economic factors
Relate to changes in the wider economy. A growing economy provides greater opportunities for businesses to make profits, so businesses welcome rising living standards.

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Political factors
Relate to ways in which changes in government and government policy can influence business.

Technological factors
Provide opportunities for businesses to adopt new breakthroughs, innovations, and inventions to cut costs and develop new products. A business producing confectionery like Cadbury Schweppes examines SLEPT factors in designing new products. For example, social factors that it needs to be aware of include changing patterns of eating. Today many consumers like to eat 'on the go' so bite sized chocolate treats are in great demand to top up consumers energy supplies. Legal factors to be kept an eye on include European Union regulations about the content of products that can be advertised as chocolate. Economic factors relate to changes in living standards and how these affect consumptions patters. Technological change is particularly important today, for example, the development of new technologies that have enabled variations on chocolate bars to be produced in an ice cream format. Political changes are closely tied up with economic ones and relate to changing governmental influence. For example, a change from a Labour to a Conservative government would effect taxation policies which would impact on the cost of chocolate production.

Environmental scanning
The process whereby businesses examine the external environment to identify key structural changes in the world around them which affect demand and supply conditions for their products

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References

Hamilton, Robert W., and Jonathan R. Macey, Cases on Corporations Including Partnerships and Limited Liability Companies, 9th Ed., West Group, 2005.

DeMott, Deborah A. “Transatlantic Perspectives on Partnership Law: Risk and Instability”, (2001) 26 Journal of Corporation Law. 879-895.[

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