Essay: Sole Proprietorship's Benefits & Limitations

Objectives of Accounting

Describe about the Benefits and Limitaion of Sole Proprietorship?

In the world of accounting there are various forms of business each having its own advantages and disadvantages that needs to be looked into before any particular business is being understood and started by the company. There is always a question that what would be the best form to control a particular business and how it would be well managed by the enterprise. There are various factors such as how to plan for the same and where to invest in the long run so that maximum benefits can be reaped out without any issue involved.

Accounting refers to the systematic process of verifying, recording, classifying, measuring, interpreting, identifying and communicating the financial information of business entity. It is a body of knowledge and practice which are concerned with the following activity:

Keeping the financial record of the financial entity.

Undergoing Internal audit

Providing advise on the matter related to tax

To ascertain the financial result in the form of profit/loss of an enterprise.

To determine the liquidity proportion of an enterprise.

To support the enterprise decision making process.

To keep the track record of all the transaction.

Sole proprietorship

A sole proprietorship is a type of self owned business and controlled by one person. There does not exist a separate legal entity concept in this form of business Sole proprietorship is an easiest form of business to start with. The person who starts the business of sole proprietorship is known as sole proprietor. A sole proprietor can start his business by using any trade name other than his own name. (Badson, 2007)

There is just not few but many reasons why a person can choose to start a business in the form of sole proprietorship, the reasons are as follows:

Ease of formation: Starting a sole proprietorship form of business is the easiest one when compared with any other form of business unit. It can be started by just one single person whereas in any other form of company; minimum number of person required to start the business is two.

Tax Benefit: Health insurance benefit for employees is not deductible in the case of sole proprietorship form of business. There is various other tax benefit given to sole proprietor.

Capital required: A sole proprietorship form of business can be started up with a small amount of capital. There is no fixed minimum capital requirement mentioned in any act to start or begin the sole proprietorship.

Decision Making: In a sole proprietorship sort of business concern, there exists a feature of quick decision making. Since there is just one person who manages and controls the entire business unit and takes all necessary decision, therefore the time taken by other business unit in consulting the other member of the company is reduced in case of sole proprietorship.

The major limitations which are associated with sole proprietorship are as follows:

Unlimited liability: The main liability of the owner is unlimited. It may extend to its personal property.

Limited Capital: The sole proprietor is the only person who brings in capital in such type of business unit, thus the total amount of capital available is very less in such type of business unit

Limited Scope of growth: In sole proprietorship, the scope for the growth of business is less due to the availability of small amount of capital and limited managerial skill and expertise.

A partnership is an arrangement between two people who with their mutual consent agree to manage the affairs of the business, and share the loss or profit of the business as decided mutually. The persons who agree to form a partnership business are known as partners. (Li, 2012)

Types of Business units

Ease of formation: The start up cost of setting up such a business unit is not too high. Even the compliance of legal formalities to start the partnership form of business is also very simple.

Large resources: The resource or funds bringing capacity of partners are more than a single person which helps in the smooth running and growth of the business unit.

Diverse skill and knowledge: Partnership is an association of skilled and expertise people who on the basis of their knowledge can help in the growth of business unit.

Flexibility: Partnership form of business is flexible i.e. its operation can be changed depending on the circumstances. Cautious approach: Due to the unlimited limited of the partners, the partners play or run the business cautiously. They hesitate in taking up any new step or investment strategy.

Non- transferability of interest: The partners cannot transfer their own interest in the firm to any other party or the third party without consulting the other partners.

Lack of public confidence: In a partnership form of business, there exist no legal binding on the partners to furnish the accounts to public, thus the partners fails to receive the confidence of the general public.

There are two types of limited company: (Blankenburg, 2010)

Private Limited Company

Public Limited Company

Private limited company is a association of at least two and maximum fifty members. The liability of members in a private limited company is limited to the extent of shares subscribed or the amount of guarantee given by them.

Continuity of existence: Private limited company enjoys continuity of existence. Company enjoys perpetual existence i.e. it continues to exist even after the death of its member.

Limited Liability: it refers to the liability of the members in a private limited company is just limited as the amount of shares held by them, or the amount of guarantee given by them.

Non-transferability of share: The shares of private limited company are not freely transferable i.e. they are not issued to general public for subscription.

Lack of secrecy: the financial information of the company can be viewed by any number of people once it is filed by the registrar of the company.

A public limited company is a company whose shares are freely transferable i.e. it can be traded in the market. Public limited company requires the minimum capital of rupees five lacs to start up the business.

Benefits of Public Limited Company

Limited Liability: it refers to the liability of the members in a public limited company is limited to the extent of shares subscribed or the amount of guarantee given by them.

Transferability of shares: It means shares are freely transferable i.e. the shares of public limited company is free for subscription, the public on their call can subscribe the share of the company which are traded or available in the stock market.

Lack of secrecy: the financial information of the company can be viewed by any number of people once it is filed by the registrar of the company.

Delay in Decision: Public limited comp0any is backed by a large number of members, thus all of them need to be consulted while taking any major decision, therefore making the decision making process time consuming.

Whatever may be the form of the company, each and every business unit is useful to the user on the basis of their need. Sole proprietorship is of benefit to those who want to take quick decision and want to have a complete control on the company. Partnership is beneficial for those users who are reluctant to take the entire risk associated with the business and thus by the mutual consent agree to manage the affairs of the business and share the profit jointly. Whereas limited company is beneficial to those users who want their share to be freely transferable, and who are not willing to accept the unlimited liability burden associated with the other form of business.

Sole proprietorship

2

Financial accounting is that part of accounting which describes the company position as a whole. Financial accounting deals with ascertaining the company’s financial result, company’s financial position and changes in the structure of the company.

Management Accounting is also known as book-keeping accounting. Management accounting is concerned with managing the activity of collecting transmitting and processing the financial information for the proper analysis of the company’s budget and internal control procedure. 

The difference between the two accounting method is as follows: (Mitra, 2009)

Basis	Management Accounting	Financial Accounting
Objective	Book keeping and recording the transaction	To ascertain the financial result and financial position.
Task	To record the transaction	To draft the financial statement
Legal binding	Management accounting report is optional to be prepared.	Financial accounting report is compulsory to be prepared.
Segment Reporting	Pertains to individual department of the organization	Pertains to entire organization.
Information	Company goal driven information	Monetary and verifiable information
Focus	It focuses on present and forecast the future	It focuses on the past recorded information.
Audience	It produces information and report for the use of organization, employees and managers	It produces reports for the external parties.

Both management accounting and financial accounting is useful for a business concern. Management accounting develops the base of accounting whereas the financial accounting carry out the other necessary task to complete the task associated with the term accounting.

3

The different sources of finance are as follows:

Short term finance

Medium term finance

Long term finance

There are various types of sources of short term finance available in the markets; some of them are as follows:

Trade Credit- Trade credit is the credit given by the suppliers of the raw material to the manufacturers and traders. Usually suppliers give 30-90 days credit to the manufacturer.(Fosberg, 2013)

Bank Credit- Commercial bank gives advances in the form of short term finance which is known as bank credit. When bank credit is allowed the withdrawer can withdraw the amount either in installment or at one time.

Discounting of Bill- Bank also advance fund through promissory notes, hundies and bills of exchange. When customer present this document to bank, bank credit the amount mentioned in the bill after deducting discount.

The types of medium term source of finance are as follows: (AbdulsAleh, 2013)

Loans: loan provided for a term of 3-7 years period is known as medium term finance. The interest on loan can be fixed or variable.

Lease Financing: Bank also provide finance lease which are supported by some foreign investors when compared with traditional source of finance. When other source of finance is not available or does not satisfy the need, it can be used.

Currency bond: through domestic and foreign entities such bonds are issued to investors. Maturity period for such bond range from 9 months to 30 years.

The types of long term source of finance are as follows:

Shares: a share is a share in the share capital which includes stock. A share is a best way of raising fund from the general public. By subscribing the shares of the company one become the member of the company and the company is able to get fund in the form of share capital.

Government grant: some firms may be eligible to get grants from the government may be national or international. Such grant is received on a long term basis by the government.

Debentures: A debenture is a document under the common seal that acknowledges loan to the company. Interest payments on debentures are tax deductible.

Factoring: factoring refers to the services provided by the financial institution. Factoring is highly convenient form of finance. Rate of interest charged on factor is same as the rate charged on bank overdraft.(Caprio, 2012)

All the three types of finance i.e. short term finance (for a period of maximum 3 years), medium term finance (for a period of maximum 3-7 years) and long term finance (for a period of more than 7 years) can be taken up by the business concern depending on their need and want of fund or capital.

Conclusion

 On going over all the sources of finance available and the business forms which can be taken from the money inherited from the will and thus keeping in mind the advantages as well as the cons the decisions of the business form should be taken. If the capital is good enough to expand the business in future it can choose to go for LLP or company as well which would provide it with a good stage to grow in the long run

The major decision is that whether the amount of loon needed can be financed from the long term or short term funds to suit the business style taken by the brothers. If they think of a limited company then there will be a need for the long term funds and of high amount also and if not small amount would also suffice. Therefore the decagons to the choose the write source rests on the company and the manager itself.

References

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