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Advantages and Disadvantages of Each Type of Business Essay Sample

Advantages and Disadvantages of Each Type of Business Pages
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Sole proprietorship is a business owned one person, who has full control of the business and how it is run. They also own all the assets of the business and any profit that it makes. In the same vein, they are also responsible for all the debts and liabilities the business accrues.

There are lots advantages by being a sole trader. The first advantage is easy formation. The formation of sole proprietorship business is very easy and simple. No legal formalities are involved for setting up the business excepting a license or permission in certain cases. The entrepreneur with initiative and certain amount of capital can set up such form of business.

Another advantage of sole proprietorship is flexibility in operations. The sole proprietorship business is undertaken on a small scale. If any change is required in business operations, it is easy and quick to bring the changes.

The third advantage of sole proprietorship is inexpensive formation and management. The cost of formation of a sole proprietorship is the minimum because no cost is involved in its formation excepting the license fee in certain cases. The management of the business is also inexpensive as no specialists are normally appointed in various functional areas of the business which is the added advantages.

Not only that, sole proprietorship do have some disadvantages. The first disadvantages is limited resources. The financial resources of any small entrepreneur as an individual is limited. He mainly finances from his own savings or borrows from financial institutions, friends and relatives as per his capacity. Thus, limited resource is the major drawback of this form of business.

Another disadvantage is unlimited liability. Since the liability of the sole proprietor is unlimited, the private properties of the proprietor is also at risk. When the business fails, the private properties of the owner are utilized to pay off the business debts. Thus, the entrepreneur must have to look this aspect carefully.

Next disadvantage is uncertainty of continuity. The continuity of the business is uncertain because the business may come to an end due to the incapacity or death of the proprietor. Even if at all the business passes on to the successor of the proprietor, it is unlikely that they may posses the business acumen like that of the proprietor. The discontinuance of the business is a social loss.

Partnership
Partnership is a business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business. Partnership also have lots of advantages and disadvanatages at the same time. First advantage is large resources. A partnership is in a position to accumulate large resources as more than one contributes capital. The added financial strength of the partners can be utilised to increase the scale of operation of the business. New partners can be admitted to meet the additional requirement of fund.

Second advantage is benefits of unlimited liability. Since the liability of the partners is unlimited it acts as great check against speculative activities and partners shall not be careless in managing the business. Further, the firm enjoys good credit standing and easily obtain loans because the creditors can realise their loan amount from the private property of the partners.

The third advantage is diverse skills and expertise. Partnership provides a scope for association of persons with diverse skills and expertise. Partners having expertise and skills in different functional areas of business can manage the business efficiently.

Eventhough, partnership form of business is comparatively better than sole proprietorship form of business, still it is not the only best option available to an entrepreneur. The following are some of the important shortcomings of partnership form of organisation which must b carefully studies before finalization of this form of business.

First disadvantage of partnership is instability. There is instability in existence because a successful firm can be dissolve on the death, insolvency or lunacy of a partner. The difference of opinion may also bring about closure of the business. The sudden closure of a successful business is a great social loss.

Second disadvantage is limited capital. There is a limit to the maximum number of partners in a partnership Therefore, the capital that can be raised from the partners is limited. Large-scale business requires huge capital and partnership is not the proper form to meet the requirement.

Last but not least, lack of harmony. Difference of opinion is the natural consequence in partnership. The conflicts and lack of harmony among the partners may not be beneficial for the business and sometimes even that lead to dissolution of the firm.

Limited Companies
Limited companies is a company that offers limited liability, or legal protection for its shareholders but that places certain restrictions on its ownership. These restrictions are defined in the company’s by laws or regulations and are meant to prevent any hostile takeover attempt.

The first advantage of private limited company is greater flexibility. A private company is required to perform lesser legal formalities as compared to a public company. It enjoys special exemptions and privileges under the company law. Therefore, there is greater elasticity of operations in a private company.

The second advantage is continuity of policy. The same persons continue to manage the affairs of a private company. Relations between them are close and continuity of policy can be maintained.  Next advantage is personal touch . There is greater personal touch with employees and customers in a private company. There is also greater incentive to work hard and take initiative in the management of business due to little separation between ownership and management.

As sole proprietorship and partnership, limited companies also have some disadvantages. The first disadvantage is lack of transferability of shares. There are restrictions on the transfer of shares in a private company. As a result a shareholder cannot leave a private company easily and quickly.

Secondly, no valuation of investment. Shares of a private company are not listed on stock exchange. There are no regular dealings in these shares. A shareholder cannot, therefore, know the real value of his investment in a private company.

The last disadvantage of limited companies is smaller resources. A private company cannot have more than fifty members. Its credit standing is lower than that of a public company. Therefore, the financial and managerial resources of a private company are comparatively limited.

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