The Advantages Of A Sole Proprietorship Law Company Business Partnership Essay

Published Date: 02 Nov 2017

In this report we have covered the topic of choosing best ownership for your SME. This report has been prepared by the collective efforts of Mr. Muhammad Ahmad Shahid, Miss. Rabia Yousuf and Mr. Usman hafeez. This report contains the individual advantages and disadvantages of sole proprietorship, partnership, corporation and Limited Liability Company. The report has summarized the conclusion in the end and we have tried to give our suggestion on selecting the best type of ownership for starting a new small and medium enterprise. We have tried our level best to explain each type of ownership structure with different dimensions. No doubt in a modern world like today and in such a dynamic environment it was really a challenging task for us to suggest the best ownership for our SME. We have also covered the financing plan for each of the ownership for our SME. Any investor interested to invest in Pakistan can read this report and can have know how about the conditions prevailing in different ownership structures in small and medium size enterprises in Pakistan.

Sole Proprietorship

It is such type of business in which a person himself is the owner of all the assets of the company and it is totally opposite of corporation and partnership, and such a person who does such kind of business is called as sole proprietorship. And in terms of business such a person who does business without formally creating a business organization is known as sole proprietor. A sole proprietorship is a type of company which is not legally bounded to be registered with the state as a limited liability company or as a corporation. It does not work as a separate legal entity and there are no legal formalities or any other licensing are necessary to create this business because it is not itself a legal entity or we called as a taxable entity. For this it is necessary to report income and expenses from the business on Schedule C of her or his personal federal income tax return. In generally a sole proprietorship gives the least protection because the personal liability of the owner of this business is generally unlimited. In this case both the business assets and the personal assets of the sole proprietor are subject to claims of the sole proprietorship's creditors. For working capital, this business is generally limited to the individual funds of the sole proprietor, and with the loans from outsiders willing to provide extra capital. In this business the owner himself is also personally responsible for all debts and liabilities incurred by the business, and the time duration for this business are not fixed like a sole proprietor can own the business for any duration of time and sell it when he or she sees fit. Like the owner, a sole proprietor can even pass a business down to his or her heirs by his or her own wish. In sole proprietorship, there are no specific business taxes paid by the company. During the lifetime of this person, a sole proprietor can sell or give away any asset because the business is not legally separate from the sole proprietor. In the case of death of the sole proprietor, the business is automatically dissolved. However, as this business is not a separate legal entity, it eventually finished when the sole proprietor becomes disabled, retires, or dies. So because of this, a sole proprietorship lacks business continuity and does not have a perpetual existence as does a corporation or any other business such as partnership.

Advantages of a Sole Proprietorship

The owner of this business has complete control and decision-making power over the business.

The sole proprietor owns all and risks all. The entire profit of this business goes to his pocket, so this motivates the proprietor to put his heart and soul in the business to earn more and more profit.

The secrecy is all time good in this case, as each and every aspect of the business is looked after by the proprietor and the business secrets are known to him only.

As the sole proprietorship business is undertaken on a small scale so, if there any change is required in business operations, it is easy and quick to bring the changes by the owner easily without any interruption.

As it is not legally bounded to any of hard and fast rules so Sole proprietorship is the least regulated form of business. Laws which are regulated are almost negligible in its formation and in its day-to-day operation and dissolution.

This is not a taxable entity so No corporate tax payments.

The biggest advantage is that there is a Minimal legal cost to forming a sole proprietorship.

No requirements of licensing or anything needed in it just few formal business requirements.

In sole proprietorship No attorney is required for set up a business.

Like that of formation of this business, the dissolution of the sole proprietorship is also very easy. As we know that the proprietor is the supreme authority and only the owner of the business and no regulations are applicable for closure of the business he can dissolve his business any time he likes.

Disadvantages of a Sole Proprietorship

This business is not free from criticism; it might be suffered from limitations and other possibilities like this, because of its nature and scope of operations in which the owner operates his business.

Because of limited resources of this business, the financial resources of an individual are limited. The owner mainly finances his business from his own savings or borrows from friends or might be some financial institutions or relatives.

There exists a limited managerial capability as modern business requires updated managerial skills in each and every activity which involve in performing different tasks. And we cannot hope a single individual to possess all the managerial talents and expertise which are necessary to carry on a business efficiently.

Because of unlimited liability of the owner, the private properties of the proprietor are also at risk. When the business fails, then the private properties of the owner are utilized to pay off the business debts to overcome that hurdle as there is no other option.

Due to uncertainty of continuity the business is uncertain because the business may come to an end due to the incapacity or death of the proprietor.

As there is only one person who is liable for everything so all responsibilities and business decisions fall on the shoulders of the sole proprietor.

Normally Investors would not prefer usually to invest in sole proprietorships.

Partnership

Partnership is 2nd stage in the emulation of form of business organization. Partnership is a form of business organization that grew out of the limitation of an individual partner. When the business the activity started expanding, there arose a need of capital, more people to supervise the business affairs.

The partnership type of business organization which was developed to overcome the drawback of sole trading organization and to meet the expanding need of a business requiring the moderate amount of capital. Here two or more person not exceeding to 20 to form of partnership by making a written or oral agreement that they will jointly assume fully responsible.

Definition

Partnership is business relationship between person who agree on to carry on a business with a view to private gain’

Elements of partnership

The essential elements of partnership as form of business organization are following as

Association of at least two people,

At least two person must joint together to form a partnership.

Contractual relationship

There must be an agreement between people hoping for forming a partnership

Earning profit

The agreement must be to share a profit or loss of the business.

Mutual agency

The business of partnership may carry on by the entire partner or by any of them acting for all. Thus every partner is agent of other partner and at the same time of the firm.

Section 4 of the partnership act 1932 as adopted in Pakistan defines partnership in the following words "partnership is the relationships between the people who have agree to share the profits of the business carried on by all or any one of them acting for all. Person forming partnership is individually known as partner and collectively a firm.

Advantages of Partnership:

Formation:

The formation of partnership is very easy. Only an agreement among the partners on paper words or spoken can bring a partnership came into existence. It includes very less legal regulations and expenses.

Huge resources:

A partnership is able to accumulate large resources and to contribute more than one capital. The additional financial strength of partners can be used to scale up the business operation. New partners may be entering to full fill the extra amount of capital.

Skills and expertise:

In partnerships business different persons are agree to do partnership. These have a different skill and expertise. If the partner having different or unique skills so they can run business efficiently.

Operations:

Like the sole proprietorship the partnership may bring changes in performance quickly and easily look at changing circumstances. These changes cannot be implemented easily in a company due to the restrictions imposed.

Risk:

In partnership business the amount of loss is distributed among the all entire partner. With the ratio of capital they invested in the business. This will reduce the burden of loss on each partner.

Unlimited liability:

Since the liability of each partner is unlimited it acts as great check against speculative activities and partners shall not be careless in managing the corporate. Further, the firm enjoys good credit standing and easily obtains loans because the creditors can realize their loan amount from the private property of the partners.

Decision making:

In partnership business it is easy to take decision because different gives people gives different opinions, so there will be chances of good and quickly decision.

Supervision:

Partners actively involved in business management. Monitoring partners eliminates wastage and leads to higher efficiency.

Reduction in management cost:

Since different functional areas managed by the partners themselves, you can save huge administrative expenses to a great extent.

Effort and reward:

There is a direct relationship between partners and reward. If enables business efficiently, you should be rewarded in the form of more profits, and improve customer satisfaction and a good image of the company

Disadvantage of Partnership:

The partnership form of organization suffers from these disadvantages also. These in brief are following as.

Lack of capital:

Due to the reduction of the maximum number of partners in the partnership. Limited capital that can be raised from the partners. Widely requires a large amount of finance and partnership are not the proper way form to meet the requirements.

Unlimited liability:

In the case of business suffer losses and the business assets are not sufficient to satisfy claimants on liquidation the personal property of one or more partner can be sold under court to clearance debts of the business. The rich and wealthy person therefore avoid to be enlisted in partnership because each partner in liable for the firm debts

Limited life of firm:

The duration of partnership is always undefined. If anyone expires, injury, withdraws, or sells his interest, or new partner admitted into a business or there arise a difference or partnership may come to the end. There many possibility to the dissolution of the firm due to internal differences.

Uncertainty:

There is uncertainty in presence because a successful firm can be liquefying on the death, bankruptcy or mental illness of a partner. The difference of view may also bring about closing of the business. The unexpected closing of a popular business is a great social loss.

Dissolution of the firm:

Difference of opinion is the natural consequence of association. Conflict and disagreement between partners may not be favorable to the company and sometimes even go toward the dissolution of the company.

Non-transferability of interest:

No member can transfer its interest in a company to other parties without the permission of the other partners. So, the partner does not enjoy the freedom to turn his interest in the company in cash.

Lack of public assurance:

There is no legal obligation on the firm to publish accounts. The public might be thinking that the firm is earning high profit. That’s why the firm loss confidence of the public.

Cautious approach:

The same approach of unlimited liability partners makes more cautious. This restricts the partners hold any risky ventures and therefore ma lost business opportunities.

Profit Sharing:

Partners share the profits equally. This can result in lack of uniformity where one or more partners are not put on a fair share of the effort in the operation or management of the business, but still reap the benefits.

Tax:

In partnership every partner must pay tax on their profit, whether they are distributed or not.

General partnership:

General partnership is one of the types of partnership business. The general partnership can be present in a partnership business or an incorporated business or company under general partnership. General Partnership is considered to be one of the most dangerous type of partnership as in this partnership, the partners have unlimited liability. The General Partnership is based or formed under an agreement signed by the partners in the partnership. The partners who sign this partnership deed or partnership agreement have unlimited liability. In General Partnership, an innocent partner can be held responsible if for the debt of the business due to his or her status of general partner. So, every partner before deciding the status of his membership in the partnership should evaluate the type of different options which he or she has got. Without evaluating the available options, the partner can face difficulties in the future regarding the business. Due to the unlimited liability status of a general partner, he is responsible for the debt of the business even at the personnel level. His or her personnel assets could be sold out or could be used to make the payment of the debt in a General Partnership. Overall General Partnership is risky and the deed of General Partnership must be formulated properly. The points mentioned in the partnership deed or agreement must be included with the consent of all the partners and it should be duly signed by all the agreed partners in the business. Duties, rights, obligations and profit division are properly decided and are disclosed in the partnership agreement by the consent of all the partners. Usually, the profit distribution depends upon the amount or percentage of capital invested in the business but the partners in General Partnership can decide the division of capital with mutual consent and mention it in the partnership agreement. The profit can also be divided equally among the partners depending upon the consent of the partners upon profit distribution.

Limited Partnership:

Limited Partnership is one of the major types of partnership in this modern era. Limited Partnership consists of two or more than two partners in the partnership business or incorporated business. A Limited Partnership must have at least one limited partner or more in the business. A limited partner is such a partner whose liability to the business is limited to his or her contribution or capital investment in the business. Limited partner is not liable for the debt of the business or company other than his or her invested capital in the business. The limited partners do not receive dividend so the earnings which they receive from the business are most passive earnings and passive losses. Usually the Limited partners are not liable to take part in the management of the business. Most of the time they are not asked to take part in the management of the business but it doesn’t mean that the limited partner is not allowed to take active part in the management of the business. If the limited partners take part in the management of the business, the business will have to pay extra salary to him for his services or the return for his services will be mentioned in the partnership deed or agreement which was prepared before starting the business practically. Limited Partnership as compare to general partnership is less risky. There is a saying that higher the risk, higher the return. Limited Partnership due to its less risk generates low amounts of return for the limited partner. The limited partner in a limited partnership is not responsible or liable for his personnel assets for the payment of the debt or for the business. Limited partnership due to its low risk factor is widely used by the investors investing in mostly the small scale projects. The Limited Partnership is considered to be more complex as compare to the general partnership. The partners in the Limited Partnership are limited with their liability as well as their management input. Limited Partnership is also known as partnership with limited liability. Limited partners in Limited Partnership are separate then the business so they are required to file the tax return separately while in the case of general partnership, the partners are considered as the organization so they act on behalf of the organization. The Limited Partnership is also known as Limited liability Partnership.

Joint Venture:

Joint venture is another one of the type of partnership. In Joint Venture, two or more corporations, businesses or companies join together with a mutual consent on a specific project for a finite time period. At the end of this finite time period, the Joint Venture between the corporations is dissolved. If the companies want to continue this Joint Venture in shape of a partnership then they may do so by mentioning this in the agreement of Joint Venture. The partners in a Joint Venture will share their capital, experiences and management skills to acquire and handle new assets required to complete the specific project signed by the both companies. Joint Venture is very beneficial for the companies. Joint Venture helps to increase the amount of capital with the company by adding up the capital of the other company with their capital. Joint Venture also helps to increase the experience of the company because when two or more companies will be joining a Joint Venture, they will be sharing their experiences with each other. Joint Venture helps to increase the management skills because in a Joint Venture, the involved parties will be sharing their management skills with each other. The terms and conditions of the Joint Venture signed by the companies are mentioned in the agreement of Joint Venture which is prepared before conducting the joint business. This agreement of Joint Venture is very much important for a new entity formed or for the new project because the acts, duties, responsibilities, rights and profit distributions between the parties included in this Joint Venture are dependent on this agreement of Joint Venture. The Joint Venture also helps to increase the capacity of the new venture. The included parties can share their capacities and capabilities to enhance the capacity of the newly formed venture. Joint Venture is very famous in this modern age of commerce among the companies because one of the most important factors for its success is that it reduces the cost of the companies to initiate a new project. Joint Venture also shares the risk of the business or the new entity among the included parties. The objectives and goals of the Joint Venture are pre decided and are mentioned in the agreement of Joint Venture before starting or initiating the business practically. A good Joint Venture always have a good exit strategy with could be exercised at the time of contingency situation. Without a good exit strategy the Joint Venture could face many disputes in a situation of contingency.

Corporation:

Corporation is an incorporated entity which is a separate legal entity incorporated after going through a lengthy registration process. A corporation is separate from its owner which means that the incorporated entity has its own existence. The incorporated entity can use its name for legal purposes. It can open a bank account with its name, it can sue another entity under its name or it can be even sued by any other entity against its name. An incorporated entity has some legal rights and obligations which are separate from its share holders. The corporation is considered to the largest type of ownership form for any business. It is mostly used to conduct business on a large scale. These incorporated entities can be private entities as well as public entities. The decision of whether to form a private entity or public entity depends upon the nature of the business, the level of the business at which it wants to operate, the cost and expenses of the business and many other factors. The liability of the share holders in case of public incorporated entities are limited to the face value of the shares which they have purchased from the company. The owner of the incorporated entity is not personally liable to the business because the formed entity has separate legal existence in the eye of law. In case of taxation, corporations have many pros and many corns. They are dissimilar from sole proprietorship and partnership in regard of taxation. The corporations have to pay double taxation. First the company pays the tax on its income earned then secondly the members or the share holders pay the tax on the amount of dividend received by them from the corporation. These types of corporations are also known as "C corporations". Some of the pros and corns of corporations are given as below.

Advantages of incorporations:

The share holders of the corporations have limited liability towards the corporation. Their liability is limited to the face value of shares purchased by them of that corporation.

Corporations are separate legal entity in the eye of law.

Corporations can gather a larger amount of capital for the business by issuing the shares and by their daily operations.

Corporations can manage to generate high amounts of spontaneous financing as corporations have larger amount of amount payables.

A corporation can reduce or deduct the tax free amount of allowance and benefits offered to the employees and managers of the corporation.

As corporation is a separate legal entity, so it files its tax return separately from its share holders. So, the corporation pays the high rate tax on the profits earned by the corporation which ultimately reduces the burden of tax on the share holders because share holders then will have to pay tax at low rate on their earnings (Dividend, salaries, and bonuses).

A corporation being a separate legal entity can sue another corporation in a court.

Transfer of ownership facility is also available for selling the shares to other person.

Changes in ownership do not affect the management of the corporation.

Corporations are everlasting which means they do not die with the death of the owner of the corporation.

Corporations can hire managers with good management skills and experience.

The stock structure of corporation attracts the investors to invest in this kind of corporation.

Disadvantages of corporation:

High fees payment at the time of registration of the incorporation. Corporations are required to pay high fee for registration of name, registration of article of association, for certificate of incorporations and other related documents.

Large amount of legal documents are required to register the corporation. Red tapsim makes it difficult for the owner to get his or her company registered.

Double taxation payment in case of corporations. First the corporation pays the tax then the share holders pay the tax on earnings.

It is more expensive and costly to form as compare to sole proprietorship or a partnership business.

Corporations have to follow intensive rules and regulations as compare to sole proprietorship or a partnership business.

The time required to get the corporation registered is very intensive as compare to sole proprietorship or a partnership business.

Corporations are entitled to follow the provincial rules & regulations, federal rules & regulations and other related rules & regulations.

Due to the separation of owner and management, the management can work in their own interest neglecting the interests of the owners.

Limited liability Company

A limited liability company is a hybrid kind of legal structure that provides the limited liability features of a company and the tax efficiencies and operational flexibility of a partnership. The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual, two or more individuals, corporations or other LLCs.

Unlike stockholders in a company, Limited liability company are not taxed as a separate legal entity. Instead, all profits and losses are transfer to the business to each member of the LLC. LLC members report profits and losses to federal tax department, like the owners of a partnership would.

Forming an LLC

While each state has slight variations to making an LLC, they all follow to some general principles:

Choose a Business Name.

There are three rules that your Limited liability Company name needs to follow:

It must be different from an existing Limited Liability Company in your state,

It must show that it's an LLC and

It must not contain words restricted by your state.

Your business name is automatically registered with your state when you register your entity, then you do not through a separate process

File the Articles of Organization.

This is a simple document that legitimizes your LLC and includes information such as your name, address, and the names of its supporters. However, other states may require that you file with a different office, as the State Corporation Commission, the Department of Commerce and Consumer Affairs of the Department of Consumer and Supervisory Affairs, or the Division of Corporations and Commercial Code. Note: there may be a registration fee .

Create an Operating Agreement

Mostly states do not require operative agreements. But an operating agreement is extremely important for multi member limited liability Company because it structures your LLC's funds and business, and provides rules and regulations for the operation. . Operating agreement usually includes rate of interest, and the distribution of profits and losses, and User rights and responsibilities and other provisions

License and a permit

When you registered your business and you have license and a permit to start or run a new business.

LLC Taxes

LLC is not a separate tax entity, so the business itself is not taxed. All the income taxes are passed on to the LLC's members and are paid through their personal income tax. The federal government does not recognize the LLC as a business entity for tax purposes, all LLCs must file as a partnership, corporation or sole proprietorship tax return.

These are following tax forms depending on your classification:

Single-member LLC files Form like a sole proprietor.

Partners in an LLC file a Form as a partnership tax return like owners in a traditional partnership.

A corporation LLC files Form, as a corporation income tax return.

Advantages of an LLC

Limited Liability:

The members are safe from personal liability for business decisions or actions of the LLC. This means that if LLC incurs debt, the personal assets of the members are usually exempted. This is related to the liability protections afforded to shareholders of a corporation. Limited liability means "limited" liability - members are not necessarily safe from illegal acts, with their employees.

Less Recordkeeping:

The greatest advantages of LLC operating company are there is less registration paperwork and there are smaller start-up costs.

Sharing of Profits:

LLCs can choose different ways to distribute earnings. Unlike a common partnership where the divided is 50/50, LLC have much more flexibility

No Minutes:

Every Corporation is compulsory to have formal minutes of meeting, and record purpose. But the LLC business structure requires no corporate minutes or resolutions and is easier to operate.

Disadvantages of an LLC

Limited Life:

Organizations can live forever, although a LLC is dissolved when a member dies or undergoes bankruptcy

Self-Employment Taxes:

Every members of an LLC are considered self-employed and must pay the self-employment tax contributions. The entire net income of the LLC is subject to this tax.

Going public:

Every Business plans to take their company public, or issuing employee shares in the future, but the LLC is not a going public.

Rules and Regulations for Sole proprietorship:

Sole proprietorship is considered to be one of the most basic types of business ownership type. The rules and regulations required to set up a sole traders business are minimum. Most of the sole proprietorship businesses do not require any type of licensing. Most of them can be initiated without even registration with the required authorities. Some sole proprietorship businesses like restaurants, shops, taxi, car hire must be registered before starting them. They will be registered with their respective or relevant authority. Without registration these types of sole proprietorship businesses cannot be conducted. Sole proprietorship businesses follow some basic types of act which includes trade description act 1972, sales of goods act 1979, supply of goods and services act 1982, data protection act 1984, consumer protection act 1987, price marking order 1991 and some other relevant documents. A sole proprietorship business is not required to file its return separately as in case of joint stock companies or public companies. Sole proprietorship businesses are not required to maintain the records of the business while listed companies are required to maintain their records and publish them to the general public. It’s not mandatory for the sole proprietorship business to issue reports to the general public. This really saves the cost of the business which ultimately saves the cost of the owner which in the case of sole proprietorship is a single person. The sole proprietor will have to inform the tax department that he or she is going to earn the income through self employment. This information would be given so that the sole proprietor can pay the income tax on his income being earned by himself. The liability status of the sole proprietorship business is unlimited. The sole proprietor is not limited to a limited liability but he or she is required to pay the complete debt of the business because he or she is solely responsible for all the profits and losses of the business.

Rules and regulations for partnership business:

Partnership business is one of the most important types of ownership when we talk about small and medium size enterprises. Most of the small and medium size enterprises are formulated on the basis of partnership. Partnership is considered to be more complex than sole proprietorship because partnership business has more rules and regulations attached to it as compare to a sole proprietorship business. One of the most important documents in partnership business is the partnership agreement. In this partnership agreement, the partners in the business specify their profit sharing ratios, their capital invested in the business, the authority of each partner regarding the business, salary to each partner if it is required to pay and other matters which are important to run a partnership based business fluently. All these matters must be settled out carefully as these matters or terms will dictate the future authorities and steps of each partner and as well as the whole partnership. There is good news for the partnership based business that it doesn’t has to pay the income tax on its profit but the partners have to pay the income tax on the profit which they get from this business. The partners of the business are completely dependent upon the terms dictated in the partnership agreement formulated by them. So, this document must be prepared carefully in order to keep the partnership running. Partnership based business and its types like general partnership, limited partnership and joint venture are recognized by the law and are considered to be a legal entity in the eye of law. At the time of preparing a partnership deed or agreement, the partners preparing it must include all the possible terms so that the business is kept away from any type of misunderstandings. The agreement should also have terms regarding the duties, responsibilities and authorities of the partners in order to reduce the conflict among the partners regarding their status and rights & obligations.

Rules and regulations for corporations:

Corporations is one of most important and most complex type of ownership structure as compare to sole proprietorship and partnership business. There are intensive amount of rules and regulations for corporations. To form a small or medium business under the ownership structure of corporation, the business has to follow through a lot of red tapsim. The law which is directly related to corporations is the corporate law. Corporate law talks about how the directors, employees of the business, shareholders, stake holders like banks, consumers, community and employers interact with each other. The entity or business formed under corporation ownership has a legal status in the eye of law. The corporation can sue on behalf of its name or can be sued in the court by any one as it has its own legal existence. In this type of ownership, shareholders hold the affairs of the company through their selected board of directors. The liability of the share holders can be limited or unlimited according to their agreement with the corporation. This type of ownership structure is used for larger entities in most of the cases. The corporation has to follow many regulations and laws but one of the most important laws which a corporation must follow is companies act, 1984. As corporation is considered to be a legal entity in the eye of law so it is required to file the tax return with the concerned tax authorities or department. The share holders of the corporations also have to pay the tax to the concerned authorities or tax department on their dividend or income received from the corporation. So, in this type of ownership structure double taxation is paid, once the entity pays the tax and then the share holders pay the tax to the tax department. This type of ownership structure is very much expensive and costly to form and requires a large amount of capital for investment in the initial stages. So most of the small and medium size enterprises tend to select the sole proprietorship or partnership for their ownership rather than corporation based ownership.

Financing a sole proprietorship:

Human beings are living on blood. Without blood human race would demise. Likewise finance is blood for any type of business. No doubt the base for any business in the world is ethics. But speaking practically finance is one of the most important and basic need to initiate a business from scratch. Even if one is willing to purchase an existed business, he or she will have to pay for that business and for that finance will be required. So, finance is important to initiate any form of business. Sole proprietorship also requires finance to initiate its operations. Without finance a sole trader cannot start the business. There are many sources for financing a sole traders business. Initially the sole trader can finance his or her business by contributing his or her own personal capital in the business. As sole proprietorship is conducted on a small scale so self financing is one of the most famous sources of finance. Other than self finance, if the business falls in small and medium category then small and medium enterprise development authority (SMEDA) also provides the finance to the sole proprietor. There are many private financing institutions in the market which provides finance to the sole traders whose legal status is not satisfactory for a bank to grant them a loan. These private institutions provide the loan to sole traders. Government also provides grant to the sole trader at different levels. If the business is at small level then the taxation is carried out on the income of that person rather than on the business. The sole trader may sell his property which has been registered under the name of the business if he or she is short of finance during the operations of the business. As he is the only sole owner of the business, so he can sale the assets and can generate finance out of it in order to boost up the business.

Financing of partnership:

Finance for any type of business is like a blood for human beings. Without proper finance, the business will struggle and can eventually be dissolved. There are different sources for finance for different types of ownership in any business. A business formed on the basis of partnership has more sources of finance as compare to sole proprietorship. A partnership business is comparatively larger than a sole proprietorship so it has more sources of financing. One of the basic sources of finance for partnership business is personal savings of the partners. Partners in a partnership business may invest their personal savings in the business. Other than this a partnership business also enjoys the privilege of accessing the banks for loan. Each partner in the partnership business can approach the bank for the loan and will be responsible for the repayment of that loan to the bank. A partnership business has legal existence in the eye of law so it is qualified to apply to the bank for line of credit. The main difference between a small loan and line of credit is that the partnership can acquire loans under line of credit when needed rather than in a shape of lump sum amount. The amount taken under this line of credit should be paid back by the partnership business to the bank. Another choice to expand the partnership business as well as the financing, the partners can agree to admit a new partner in the business so that the total financing could be enhanced on his or her inclusion in the partnership business as a partner. The newly admitted partner can be an active partner or sleeping partner. The status, rights, responsibilities, duties and obligations of the newly admitted partner will be disclosed in the partnership agreement with the consent of all the partners in the business. Angel investors can also become a source of finance for a partnership business. Angel investors here mean that the investors which contribute a large amount of fund in the business and in return acquire some of the ownership of the business depending upon the agreement between the partners and the angel investor.

Sources of fund for corporations:

Corporation is the biggest type of ownership as compare to sole proprietorship and partnership. Finance in any corporation is a very curtail and important factor upon which the operations of the business are dependent. Corporations have two basic sources of financing, one is the equity financing while the other is debt financing. Equity financing is finance arranged by issuing the shares to the general public while debt financing includes loan taken from different banks and financial institutions. A corporation is a separate legal entity from their owners so the banks provide them the required loans if the terms between the bank and the corporation are settled down. Banks feel less risky in providing the loan to the corporations as compare to the sole proprietorship and partnership business because before granting the loan, banks easily evaluate the performance of the corporations from their financial records maintained by the corporation. Other than banks SMEDA also provide loans to those corporations which fall under the category of Small and Medium size enterprises. Some of the corporations receive advance payment from their customers. Corporations can also arrange a heavy amount of spontaneous financing as the credits of the corporations are generally higher than a sole proprietorship and partnership business. Corporations can even get the finance from different financial institutions. Due to its separate legal status, most of the investors feel free to provide loan to corporations. As compare to the sole proprietorship business and partnership business, corporations can gather greater amount of finance. The corporations also go for joint venture in need of finance. Joint venture increases the amount of capital with the corporation and increases its capacity of operations.

Registration Process of a Sole Proprietor

As we know that sole proprietorship is a business that automatically begins when a single person decides to go into business of their own choice. For sole proprietor it’s not compulsory to be register with a government agency as a condition of operating the business. Sole proprietors and the business which they are running have no separate identity from one another as they both are considered to be the same which exposes the sole proprietors personal assets to business obligations and debts. A sole proprietorship is also known as a sole trader or sole owner, or simply we can say that proprietorship is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business as we said before. All profits and all losses are held upon the sole owner or the proprietor / trader. All assets of the business are owned by the owner and all debts of the business are the debts of the owner and he himself must pay them from their personal resources. So, the owner has unlimited liability in such kind of business. It is a "sole" proprietorship in the sense that the owner has no partners like in partnership.

This is the most straightforward structure and the easiest form of business. Basically it means the business decisions are being made by one person which is only the owner. Of course, it doesn’t necessarily mean that the business has only one worker because we are talking about the principal the owner of that firm. The sole trader can employ others to do any or all of the work in the business by his/her own choice. So, establishing this type of entity is easy as compare to others, getting financing for such a concern can be a bit difficult, and the owner himself is personally liable for the business as we already discussed. On the other hand if see through the perspective of customers than in case of a legal claim by a customer, or if there is a financial problem with the business occurred, the creditors can sue the proprietor/owner.

Steps to Register a Sole Proprietorship

This is quite simple registration process in sole proprietor than other firms, however instead of doing it by yourself, gets a tax consultant or may be a lawyer to do it for you at a small cost, it is not expensive. The following steps need to be taken are as follows:

Firstly you have to decide on and select a Business Name, Ensure that the sole proprietorship's selected business name is available by conducting a search with the secretary or either by the department of state website where the sole business operates. This will ensures you that either the another company registered with the sole proprietors home state does not have a business name that is too similar with yours business name;

Then you have to Print the Letter Heads for your business, envelopes and visiting cards too;

After the confirmation of the business name, you will Write an Account Opening Request to your Bank, which states that this is your business and you are the sole proprietor of it rather than any other person;

Then Open an account at a local bank's branch close to you for your further procedures;

After opening an account the, next request from you is to the bank to issue a letter stating that this is your account and business;

When you get the letter than you submit the bank certificate and your application with the Tax Authority i.e. the Federal Board of Revenue (FBR) which was previously known as the CBR Central Board of Revenue;

Now suppose if you are on a job, you already have a NTN (National Tax Number), so the same NTN will be used for your Sole Proprietorship status as well.

So once the status is added, you are a registered legal entity.

Registration Process of a Partnership

Now if we talk about the registration process of partnership than this firm is not required by law and there is no penalty for non registration. But however there are some disadvantages for not registering are also there. For example, if any dispute occurs among the partners or with the previous partners, than in this case no suit in any court of law can be filed by such partners or ex-partners against the firm which is not registered or against themselves to enforce any right arising from any contract/agreement or conferred by the Partnership Act, 1932. So, an unregistered firm has this disadvantage that it cannot institute a suit against a third party to enforce any right arising from a contract which the made, e.g. for the recovery of the price or cost of goods supplied. It must be remembered that a third party may file suit against an unregistered partnership. And even in this case, the partnership can not mention any amount that may be outstanding to them in the court. There is no protection to the partners’ liability in an un-registered partnership. As there is no formal documentation or evidence stated that they are in partnership, suppose if one decides to deny the existence of the partnership than there is not much that can be done about it legally. So, prior registration is therefore considered to be necessary.

Nevertheless registration can give many advantages to the firm. So, first of all Form -I needs to be filled by you which act as a partners and then it is attached in appendix B. After above the Partnership Deed is prepared on the Stamp Paper which is worth Rs.500. A sample for the statement of Partnership Deed is also must be there in appendix B. After this registration you will have to pay fee of Rs. 500 which also needs to be deposited in National Bank of Pakistan through Chelan Form. It is mandatory for the partnership firm to be located in commercial area. With all above there is also needs of Copy of Lease Agreement or Ownership proof needs to be there as well. A template of Lease Agreement is also attached in appendix B. The next requirement after above is the attachment of computerized National Identity Cards of all Partners and Witnesses, and then it is mandatory that all papers should be attested from Notary Public. And the partners must be contact the office after three days of submission of papers. And in the last an affidavit regarding accuracy of papers and existence of office needs to be submitted on stamp paper of worth Rs. 5.

Registration process of a Corporation

For the registration process of a corporation the name must be officially approved by the Registrar of Companies. When you apply to the Registrar for the approval of a name, it is recommended by the registrar that two or three possible names ending with the word "limited" be submitted as this should avoid the unnecessary delays in name. So, applicants should keep in mind that a name is not likely to be approved if it is comes under following conditions:

If your suggested name is similar to the name of an existing company

The name which you suggests is considered misleading or confusing

If this name implies links with royalty

Or if this name includes the word "Imperial", "National", and "Corporation, or Co-operative.

But in case of a subsidiary company proposes to adopt the name of its parent company, the very first it must furnish its written consent for the use of its name of the parent company under which it is going to work. Then after this if once the approval of the Central Bank has been obtained by that person, then the next step is the registration of the company. 

So for a company to be registered, the below given documents and information must be filed with the Registrar of Companies as early as possible:

The Memorandum and Articles of Association.  The Memorandum must state the following things;

The name of the company must having a word with "Limited" as the last word

The registered office of the company, that where is the location of that office.

The objects of the company which you are going to start , which it is advisable by the registrar that they should be as wide as possible so as to enable the company to engage in any kind of business or activity easily.

Then here you have to write a statement that the liability of the members is limited by shares or by guarantee.

After that the amount of the share capital and details of the shares authorized to be issued, and all the subscribers to the memorandum together with the number of shares for which they have subscribed must be mentioned.

The next step for the process is the Articles of Association which basically govern the company's internal procedures and functions. The articles contain all the rules governing the internal management of the company and its members and regulating the rights of its members. The articles of association deal with matters such as:

General meetings of the company which held

Members voting rights

Transfer of shares in the company

Appointment and powers of directors regarding the company which you selects

Dividends of the company

Companies Accounts & Audit

MOA & AOA, which have been made after careful study by lawyers and Focus Business Services which performs in your company, must be made available but care should be taken that the first few main objects are tailored to the specific circumstances and the main business objects of the company which you are operating.

Your company list of the directors and the secretary's name and details must be present there. A minimum of one director is required, but there is no maximum amount mentioned in it.  And there is no necessity to have local directors of a company; this will be advisable especially where the provisions of a double tax treaty are going to be utilized. Company directors can also be worked as Secretaries, but in case of a sole Director, he cannot act as a Company Secretary at all, except only in the case of a "one shareholder - one director - one secretary company" when one person can indeed act in all three mentioned capacities. 

After above the address of the company's registered office, which will be the place where all official notices will be served of the company.

Then at the last the final step is the declaration or affidavit from a lawyer confirming that all formalities provided by The Companies’ Law have been properly applied and complied with in relation to the incorporation.

Once all the required documents have been stiff with the Registrar of Companies and he has satisfied himself that they are in order then he will issue a Certificate of Incorporation to the company’s partners. The company formation and registration procedures, includes the printing of all official stationery, documents and opening the necessary bank accounts which are required, can usually be completed within a period of two weeks not more than these days, after this all the company can start operating immediately.

Registration process of LLC:

Limited Liability Company is becoming very popular among the small and medium businesses. Registration process of a Limited Liability Company is very simple and easy to form. Following are the steps required in registration of a Limited Liability Company:

Where should the company operate?

Firstly we will have to pay the fee for filling the article of organization in which we will mention the city in which the Limited Liability Company will be operating. We must mention all those cities in which Limited Liability Company is going to operate or sell its products.

Select the name of Limited Liability Company

In this step we select the name of our Limited Liability Company. The name should be unique in nature and must be new.

Selection of the agent

A registered agent or entity authorized to receive the legal partners of the Limited Liability Company is selected after selecting the name of Limited Liability Company.

You will organize your Limited Liability Company by yourself or hire an attorney?

You will have to decide that whether you will prepare the file and organize the Limited Liability Company by your own or will hire an external attorney for the proceedings.

Deciding the ownership of Limited Liability Company

Before filling the article of organization of Limited Liability Company, the ownership structure will be decided in which the contribution of profit will be stated and the percentage of sharing profit will also be mentioned in the article of organization of Limited Liability Company.

Filling the article of organization

As soon as the article of organization is filled the Limited Liability Company gets registered. The article of association contains the name of members, address of members and managers, statement of purpose of Limited Liability Company, Infinite or finite life time of Limited Liability Company and name & address of agents.

Management structure and managers selection

Then the decision is made whether Limited Liability Company will me manager managed company or member managed company. The managers are hired according to the situation.

Role of sole proprietorship in economic development:

Sole proprietorship is the basic type of ownership structure. In this structure only one person is the sole owner of the business and is entitled for the complete profits and losses of the business. There are many roles being played by the sole proprietorship businesses in the economic development of Pakistan. Most of the small and medium scale business has been established on the ownership structure of sole proprietorship. One of the basic roles of sole proprietorship in the economic development of Pakistan is the payment of tax by the sole trader to the government. So, sole traders contribute in the taxes of the government making the fiscal budget stronger for the economic development. Different goods and services are provided by the sole traders to the general public. Sole traders also provide job opportunities at starting level to the general public. The sole proprietorship helps to improve the living standard of the owner of the business and the family of the owner of the business. It increases the purchasing power of the owner and his or her family making an upward shift in the demand curve in the market. Due to high purchasing power the demand for the products in the market will increase according to the basic economic laws. So, sole proprietorship is considered to be small units which are necessary for the growth of economy in any country specially in a developing country like Pakistan. As sole proprietorship has a single owner so it also provides self employment opportunity for the owner of the business.

Role of partnership in economic development:

Partnership business is one of the types of ownership structure under which most of the small and medium size businesses are established. This type of ownership structure is comparatively easy to form as compare to corporations. The partnership business has many advantages with respect to its role in the economic development of Pakistan. Each partner in the partnership business pays the tax on the income which he or she earns from his or her business activities. So government receives tax from each partner associated in the partnership business. This becomes a source of revenue for the government. This source of revenue increases the total revenues for the government for forming the fiscal budget. Partners in the partnership business can also hire management to manage the affairs of the business. So, the partnership business is also involved in providing the job opportunities for more than one person. The partners in the partnership business are self employed which is again one of the main roles of partnership business in the economic development of any country. This partnership business increases the living standards of the partners in the business as well as their families. Due to the increase in the living standards of the partners, their purchasing power is also increased making increase in demand. This increase in demand forces the producers to produce and supply more in the market to meet the new increased demand. The producers increase the demand either by increasing the number of units produced by the plant per day or by increasing the labor as per the requirements of the product being produced. So, partnership business has a significant role in the economic development of any country.

Role of corporations in economic development:

Corporations are the giant ownership structure which is most beneficial for the economic development of the countries like Pakistan. These corporations invest a huge amount of capital in order to initiate its operations. Corporations also provide a huge amount of job opportunities for the general public. The infrastructure is established for these corporations. These corporations also bring foreign investments in the country in shape of multinational corporations but these multinational corporations are not categorized under small and medium business enterprises as they are ranked as economically significant entity. Corporations also bring enhancement in technology usage which ultimately develops the economy of the country. Corporations not only provide jobs but also pay tax to the government on their huge earnings. So, these corporations contribute a huge margin of tax to the government. The turnover and the revenues earned by these corporations are very huge which ultimately increases the tax rate applied on their earnings. Corporations provides a safe environment for the employees to work in which creates a sense of responsibility and enhances the confidence among the employees regarding their jobs making them satisfied. The purchasing power of the employees of the corporations also increases due to the increase in their living standards. So, Corporations play a vital role in the economic development of any country whether it a developed country or a developing country like Pakistan.