Question

You are an accountant with a client that wants to set up a new company. She has come to you to ask what type of company to form. She is trying to decide between a corporation, an LLC, or a sole proprietorship. Taking into account the ability to raise capital, liability protections, taxation issues, ability to transfer ownership, and any other aspects you can discover discuss the pros and cons of the various entity forms. You can use your textbook but you should consult other courses as well. Hint: The right answer for your client depends on what kind of company your client is opening and what they want to accomplish. The best you can do is give the client some information to think about. To really give your client the right advice, you would have to ask them a lot of questions. This post should cover the general aspects of the various type of business entities.

Answer 1

A person can start business with set up of limited liability company (LLC) or a corporation like partnership firm, limited liability partnership etc. or a sole proprietorship.

Different type of business set up have different type of reporting responsibilities, pros and cons. Such person needs to identity which type of business set up s/he wants to establish based on his/her business requirement.

In Limited Liability Company there are certain advantages like limited liability, separate legal existence, common seal, perpetual secession etc. these advantage are missing in sole proprietorship. Also limited liability company needs to follow various reporting requirements to various authorities, but in sole proprietorship reporting requirement is comparatively very less.

In case of sole proprietorship death of the owner of business results into closure of the business but in case of limited liability company existence of the company does not comes to end in case of merely death of owner/shareholders.

There can be more than one owner in company i.e. shareholders but in case of sole proprietorship one person shall be the owner and in other person wans to enter into sole proprietorship as owner then business set up needs to be changed from sole proprietorship to partnership firm or other corporation.

Ownership can be easily transferred between persons in case of limited liability company by transferring of shares. But in case of sole proprietorship transfer of ownership is not so easy as compared to limited liability company.

In case of limited liability company liability is limited to share capital or guarantee given whereas in case of sole proprietorship liability of owner is unlimited.

Also, tax rate for limited liability company and sole proprietorship is not same in may countries. Sole proprietorship have low tax rate whereas for getting several kinds of government benefits, deductions and grants, limited liability company is preferred.

There is separation of management and ownership in case of limited liability company. Which is mostly missing in sole proprietorship.

Company can easily access funds and raise funds externally by issuing several kinds of financial instruments. Company can also raise funds without transfer of ownership i.e.. by issue of bonds or debentures. There is also other trending modes of raising funds for companies e.g. foreign currency convertible bonds, depository receipts etc. Whereas sole proprietorship can raise fund either internally i.e. from owner or can take loan.