Pros and Cons of the Structures

Pros and Cons: what are the advantages and disadvantages of the main business structures?

Set below are some of the advantages and disadvantages of the main business structures: sole trader, partnership and corporation (Incl. Company, cooperative, etc).

Sole trader

Advantages:

· It is the simplest form of vehicle, with the least legal and administrative procedures and costs of implementation.
· The owner has full control of the business.
· The owner is entitled to the entire profits of the business.
· The owner is entitled to sell or discontinue business if he pleases.
· Discontinuance of the business requires minimum legal costs.

Disadvantages:

· Owner has unlimited personal liability for debts and for negligence (eg employees’ errors) committed while conducting the business.
· Success and continuance of the business are tied to the ability and the health of the owner.
· Managing skills is confined to that of the owner and the employees.
· Expansion and raising additional capital is more difficult than when more sophisticated vehicles are used.
· It is unsuitable when more than one person is providing capital for and in conducting the business and each desires a share in control and management of the business.

Partnership:

Advantages:

· The legal and administrative procedures and costs of formation are relatively inexpensive.
· A partnership provides for the business the combined labour, expertise, management skills and financial resources of the partners.
· There is a greater ability to overcome the consequences of the disability, sickness or accident of a partner than for a single proprietor.

Disadvantages:

· The unlimited liability of each partner for debts and the conduct of the business, including for activities of each partner.
· The potential for disputes and breakdown in the mutual trust of the partners.
· More potential to raise further capital than sole trader, but less than corporate business.
· Potential problems relating to the retirement or admission of partners.
· There is a potential for termination in the event of dispute and may be considerable legal and other costs in the event of a disputed dissolution of the partnership.
· A partnership is not a separate legal entity for most purposes and requires participation of all partners for many legal transactions.

Corporation

Advantages:

· Corporations have perpetual succession (until wound up or dissolved) and their continuance is not affected by the death or withdrawal of shareholders.
· Shareholders generally have limited liability and are not liable for the debts of the corporation.
· The corporate structure affords considerable flexibility in the organisation, management and financing of the corporation because:
(a) Corporations may have a large number of shareholders (50 shareholders for private companies) while partnerships are restricted to only partners;
(b) Shareholders may have varying entitlements to dividend and control;
(c) Corporations may be private or public;
(d) It is possible to seek funds from the general public, subject to compliance with statutory requirements;
(e) It is easier to finance larger business projects through the corporate structure; and

· Ownership and management of corporation can be separated and control can be vested in directors and in some other groups of shareholders.
· Shares can be bought and sold without interfering with the corporate structure.
· There is considerable scope for tax planning.

Disadvantages:

· The corporation structure is more expensive and complex to form and to maintain in existence in terms of legal and accountancy work and administration.
· There are more detailed and rigorous legal and financial reporting requirements than for partnerships or for sole trader although proprietory companies, especially those that are “small”, have fewer requirements to meet than other companies.
· As some of the corporation’s financial information must be filed in publicly available registers, there is less privacy regarding its financial affairs than for partnerships.
· Shareholders, particularly minority interests, may not have effective involvement or control over decision-making or management.