Types of Business Organisations - Essay Example

Types of Business Organisations Sole proprietorship and Private Limited Companies (Write here) (Write the of your college/school) if not the name of your city/state or city/country. ABSTRACT This paper focuses on a sole proprietor John Smith and his plumbing business which he has run for the last 15 years. He is suddenly offered a proposal by a growing private limited company called "Plumbco Ltd" who offer to buy out his business and at the same time allow him to be the director of the company. We look at the predicament that John Smith finds himself in and how he weighs the advantages and disadvantages of joining the private limited company or staying alone and running his plumbing business by himself. We compare and contrast these points and then close the article by examining what will be the final and ultimate factor that will help John Smith make this important decision. Types of Business Organisations Sole Proprietorship: Sole proprietorship is the simplest type of business organisation. A sole proprietor is the sole owner of all of the assets of the business and is solely liable for all the debts and obligations of the business. Unlike a corporation, the business of the sole proprietor is not considered a separate entity. Rather, it is considered an extension of the individual. The sole proprietor is personally responsible for all legal debts and obligations of the business and is entitled to all the profits of the business. Angela Schneeman (2002). John Smith is a middle-aged man who has been running his own plumbing business successfully for the last 15 years and has built a good reputation within his community. His plumbing business has improved with each year and is doing very well. John's plumbing skills and the work he has done over the years in his neighborhood has earned him a very good reputation and helped him to build a solid client base. John is very happy with his business and plans to hand over the business to Adam, his son, as he wants him to take over this sole proprietorship business when he decides to retire. According to Angela Schneeman (2002) the sole proprietor may delegate decisions and management of the business to agents, but all authority to make decisions must come directly from the sole proprietor, who is responsible for all the business related acts of employees. Sole Proprietorship Advantages: Running a sole proprietorship plumbing business for the last 15 years has provided John many advantages such as being able to choose his working hours, be his own boss, not have to answer to anyone but himself and finally enjoy all the benefits and profits earned out of the plumbing business. Working within his neighborhood also gave him the opportunity to know the residents in person and also establish new friendships and build himself a good reputation, since all of the plumbing work was done by John himself. Sole Proprietorship Disadvantages: On the other hand as John started to get older he began to notice, that working as a sole trader in his business made him shoulder the entire workload by himself, and when he needed help there was no one around, and all accounts and tax related matters had to once again be prepared in detail by him. The other big concern of John was the problem of business continuity, because he was nearing the age of retiring and wanted his son Adam to take over the business but Adam showed no interest when it came to plumbing and instead wanted to become a lawyer. John was concerned as to what will happen to his business. "Plumbco Ltd" a growing private limited company was interested in setting up its operations in the neighborhood that John Smith lived in, and they heard about his reputation in the neighborhood as a plumber and of the number of years that he had served the community. With this in mind, they approached John and gave him a proposal in which they wanted to buy out his plumbing business of 15 years and at the same time make him a director with "Plumbco Ltd" This proposal by Plumbco Ltd put John in a predicament, because he loved working by himself and building his business in his community but at the same time he knew that he was getting old and things were harder to do than before. John desperately needed help with the plumbing and also someone to take care of the accounts and tax formalities, joining as a director at Plumbco Ltd seemed inviting. He had a vague idea about the workings of a private limited company and decided to spend some time trying to find out about Plumbco Ltd and what a private limited company was all about. Private Limited Company: According to Vijay Luthra (2005) A private limited company is a type of incorporated firm, which offers limited liability to its shareholders but which places certain restrictions on them. These restrictions are spelled out in the firms Articles of Association or Bylaws and are meant to prevent any hostile take over attempt. They generally state that the (1) Shareholders cannot sell or transfer their shares without offering them first to the other shareholders for purchase, (2) Shareholders cannot offer their shares or debentures to the general public over a stock exchange, (3) The number of shareholders cannot exceed a certain figure (commonly 50). Advantages & Disadvantages: After a month of research and speaking to his friends John knows that if he does accept to be the director of "Plumbco Ltd" and sells out his business to them he knows that (Jim Sherlock, Jonathan Reuvid 2004) joining a private limited company will help him to ease his workload, make more money through the overall profit and shares of the company and also that he would not be held responsible for any debts that the company suffered. The disadvantage of selling out his business and becoming a director would mean that John would lose his personal touch of interacting with his customers, the accounts and tax regulations of the company becomes more complicated than a sole proprietor, which meant John would have difficulty understanding the financial aspect of the business. John is impressed with the ideal of selling out and joining "Plumbco Ltd", because he decides that the advantages according to him outweigh the disadvantages he would face. However before making a final decision, he decides to explain the situation to his son Adam, and ask him for his final opinion on whether he would like to take his place and continue the plumbing business in the neighborhood or if he was going ahead with his plan of becoming a lawyer. Conclusion: John's final decision would be made by what response his son Adam came up with, if Adam wanted to pursue a career, as a lawyer then John would sell out to "Plumbco Ltd" and join as a director, however if his son wanted to take over the business and run it by himself, then John would turn down the offer by "Plumbco Ltd" and continue his plumbing business as a sole proprietor until his son Adam was ready to fill shoes. References: Luthra, Vijay (2005) 'BUSINESS STUDIES COMPANION An Essential Dictionary of Accounting, Economics and Management. First Edition. Infocorp Limited. Schneeman, Angela (2002) 'The Law of Corporations, and Other Business Organisations'. Delmar. Sherlock, Jim, Reuvid, Jonathan (2004) 'The Handbook of International Trade: A Guide to the Principles and Practice of Export'. Kogan Page Limited. Read More