Before deciding how to organize an operation, prospective entrepreneurs need to identify the legal structure (form) that will best suit the demands of the venture.
The necessity for this derives from changing tax laws, liability situations, the availability of capital, and the complexity of the business formation.
There are basically five forms of the business which includes
- Sole proprietorship
- Limited Company
(i) Sole Proprietorship
A sole proprietorship is a business that is owned and operated by one person. This individual has a right to all the profits and bears all of the liability for the debts and obligations of the business.
Advantages of Sole Proprietorship;
- Ease of formation; less formality and fewer restrictions are associated with establishing a sole proprietorship than with any other legal.
- Sole ownership of profits; the proprietor is not required to share profits with anyone.
- Decision making and control vested in one owner
- Flexibility; Management is able to respond quickly to business needs in the form of day to day management decisions as governed by various laws and good sense.
- Relative freedom from governmental control; except for requiring the necessary licenses, very little governmental interference occurs in operation.
- Freedom from the Corporate business taxes; Proprietors are taxed as individual taxpayers and not as businesses.
Disadvantages of Sole Proprietorship;
- Unlimited liability; the individual proprietor is personally responsible for all business debts. This liability extends to all of the proprietor’s assets.
- Lack of continuity; The enterprise may be crippled or terminated if the owner becomes ill or dies.
- Less access to capital than other forms of the business
- Relatively limited viewpoint and experience; The operation depends on one person and this individual’s ability, training, expertise will limit its direction and scope.
A partnership is an association of two or more persons acting as co-owners of a business for profit. Each partner contributes money, property, labor, skills, and each share in the profits as well as the loss of the business.
Advantages of the Partnership
- Easy formation compared to corporations
- Direct rewards or shared profits
- Growth and performance facilitated; in a partnership often is possible to obtain more capital and a better range of skills than in a sole proprietorship.
- Flexibility; a partnership often is able to respond quickly to business needs in form of day to day decisions.
- Relative freedom from governmental control and regulation. Little governmental interference occurs in the operations of a partnership.
- Possible tax advantages. Most partnerships pay taxes as individuals thus escaping the higher rate assessed against corporations.
Disadvantages of partnerships
- Unlimited liability
- Lack of continuity; if any partner dies, is adjudged insane, or simply withdraws from the business, the partnership arrangement ceases.
- Relative difficulty obtaining large sums of capital
- The difficulty of disposing of the partnership interest
(iii) Limited liability Company
It is a form of a business that has the legal status different from the owners of the business. It can either sue or be sued. It has a limited liability in which it can be declared bankrupt without the owners suffering the same fate.
Advantages of a Limited Company
- Owners have limited liability
- Continuity or survival of the business is very high in case of death or retirement of owners
- Easy to raise additional capital
- Have a formal management structure
- Increased ability and expertise
The disadvantage of a limited Company
- Its establishment is time-consuming and expensive
- Tax burden
- In the case of a public company is difficult to maintain business secrecy
- Activities are limited and restricted by the charter and by various laws.
Other forms of business include:
it is owned by shareholders who elect a board of directors to oversee the major policies and decisions. It is considered by law to be a unique entity, separate and apart from its owners.
it is a voluntary association of persons to promote the common interest of members. It is a business organization owned and operated by a group of individuals for their mutual benefits.
Further read: Challenges in Starting a business in Tanzania