Sole proprietorship and Partnership

Legal provision decides the legal form of a new venture can be:

• Sole proprietorship
• Partnership
• Joint Stock Company

Every single type of organization has its own unique traits. In addition to its benefits, it also has certain drawbacks. The choice of legal form is determined by the particular circumstances, worries, and goals of the entrepreneurs.

Sole Proprietorship

A single individual owns, runs, and controls a sole proprietorship, also known as a sole trading concern. The firm owner invests capital, makes all business decisions, collects all profits, and also absorbs all losses. He or she is liable for all business debts personally and in an unlimited capacity. The majority of Nepal's innovative small enterprises are sole proprietorships. Companies founded with total assets of Rs. 3 cores or less are regarded as small business organizations. According to the private firm registration statute of 2014 B.S., they are appropriate for small local businesses that only need a minimal amount of capital to register and start operating. This kind of business is simple to open and shut down. It is a one-man show with help from staff. A sole proprietorship can be established for a lot less money and with more ease than other types of business ownership. To perform business activities, only the necessary licenses and licences must be obtained.

Because everything has both benefits and drawbacks Additionally, sole trading concerns have some benefits and drawbacks.

Advantages of Sole Proprietorship:

• Easy to establish and dissolve: Since there aren't many legal requirements, starting one is simple. In some unique circumstances, all that is needed is a license and a few legal requirements. It merely needs a straightforward registration. It is simple to establish and cancel the agreement because no additional parties are required to join it.
• Flexibility: A sole proprietorship is the most adaptable business type. It is simple to both extend and contract.
• Quick decision: Due to the fact that there is only one owner/manager, he/she is able to make all business-related choices on his/her own without consulting with anybody else. So, making a quick decision is possible.
• Motivation to work: Any and all earnings made by the business must go to the owner or proprietor. The two are closely related in terms of effort and return. Thus, he or she will be driven by themselves.

There are several other merits as follows:

• Minimum government regulation
• Tax advantages
• Advantage of satisfaction
• Social benefits:
  • Self-employment
  • Development of cottage and small scale industries
  • Promote entrepreneurship in the country

Disadvantages of Sole Proprietorship:

• Unlimited liability: All business losses are personally responsible for by the owner. Due to his concern over losing personal property in the event that the business fails, the proprietor becomes conservative and cautious.
• Limited capital and expansion: All necessary capital must be managed by the business owner. Therefore, it will be challenging to raise money for expansion and other operations. Increased workload brought on by the business' expansion makes it impossible for one person to handle all of the additional tasks.
• Lack of specialization: Owner has only rudimentary managerial skills. Due to the owner's excessive workload, it is rare to find a single person with all the necessary business success traits, such as wisdom, judgment, etc.
• Uncertain life: A solitary proprietorship cannot enjoy continuity of existence. It is entirely depending on the owner's life. Because to the owner's death, insolvency, or illness, business operations may come to a halt. His inheritors might not be competent enough to run the company successfully.
• Loss on absence: Without the owner, the business cannot be conducted, which causes the company to lose money. The manager, owner, or proprietor cannot take a leave of absence that results in a loss.

Partnership Firm

An arrangement of two or more people operating a firm as joint proprietors and splitting earnings and losses in proportion to their capital investments is referred to as a partnership. All risk is borne by the couples. For the benefit of both parties, the partnership integrates the skills and resources of multiple persons. Partnership is governed by a partnership document. It is a partnership agreement. The partnership is appropriate for businesses that provide a profession or service. Under the Partnership Act of 2020 B.S., a partnership firm is registered in the wholesale and retail trade, small and medium-sized sectors.

Types of partnership:

• General Partnership: This collaboration carries a limitless amount of risk. The company venture's partners make financial investments and take an active role in management. This form of collaboration is further broken down into two categories: general partnerships that have no time limits and specific partnerships that have deadlines or that last until goals are achieved.
• Limited Partnership: The partnership's unlimited and limited obligations are mixed together in this. Some partners' liability is capped at the amount of their capital investment. They are not held personally responsible for the company's debts. A general partner with unlimited responsibility must be present in a limited partnership firm. The limited partner is not permitted to take part in company management. Even the death or retirement of the limited partner does not result in the firm's dissolution. In Nepal, limited partnerships are not used.

Advantages of Partnership:

• Easy to establish and dissolve: As it only has a few participants, it is simple and affordable to establish as well as dissolve. It can be created and destroyed with a minimal number of legal processes.
• Better management: Since there are two or more owners, a corporation can be managed better than a single proprietorship.
• Dividend risk: The firm should not pay any dividends to anyone because it only has cash from a small number of owners, hence there is no dividend risk.
• Secrecy: There is no confidentiality issue due to the small number of partners. There won't be any leaks of the crucial details.

There are other advantages of partnership firms as follows:

• Business expansion: The substantial finance raised from numerous partners has made it possible. In comparison to a sole proprietorship, it is simpler to expand.
• Business loss deduction: It may be subtracted from other sources of income. As the losses are shared among all the partners, they can be covered.
• Tax advantage
• Minority protection

Disadvantages of Partnership:

• Unlimited liabilities: Each general partner is subject to unlimited liability. All losses incurred by the company must be borne by the partners.
• Delay decision: Since all managerial decisions made in a partnership firm should be made by all the partners collectively. Making a decision as a group through meetings may take a while.
• Low public confidence: The public has a low level of trust in partnerships. They make every effort to avoid using the company's goods and services.
• Nontransferable ownership: A partner cannot give ownership of a partner to a different partner. The business must be dissolved if one of the partners decides to quit.
• Conflict: If there is a lack of trust between spouses, conflict may develop.
• Liquidity: Each partner's investment has a modest level of liquidity.
• Existence: The business terminates automatically with the passing of any party. Therefore, there is no assurance regarding the firm's future.

Reference:

Agrawal, Govinda Ram (2014). Entrepreneurship and small business management in Nepal . KTM: M.K Publishers and Distributors.

DK, S. (2015). http://www.yourarticlelibrary.com/. Retrieved from yourarticlelibrary: http://www.yourarticlelibrary.com/partnership-firms/partnership-firms-definition-features-advantages-and-disadvantages/40804/

Webber, K. (2011). https://www.thecompanywarehouse.co.uk. Retrieved from thecompanywarehouse: https://www.thecompanywarehouse.co.uk/blog/2010/05/24/advantages-and-disadvantages-of-a-sole-trader/