1.
Basic Concept
Sole Ownership (Sole Proprietorship): A business owned, managed, and
operated by a single individual. There's no legal distinction between the
owner and the business.
Partnership: A business structure where two or more individuals join forces
to own and operate a business, sharing profits, losses, and responsibilities
according to their agreement.
2. Essential Features / Characteristics
Sole Ownership
Single Ownership & Control: One person makes decisions and controls
operations.
Unlimited Liability: The owner is personally liable for business debts.
Simplicity: Easy and inexpensive to set up; minimal formalities.
Direct Claim on Profits: All profits belong to the owner.
Partnership
Multiple Owners: Two or more partners contribute resources and share
control.
Shared Responsibility: Partners jointly manage the business.
Unlimited (Often Joint) Liability: Each partner may be personally liable for
business obligations.
Partnership Agreement: Ideally formalized in a partnership deed outlining
duties, profit-sharing, and dispute resolution.
3. Advantages & Disadvantages
Sole Ownership (Sole Proprietorship)
Advantages
1. Easy to start – minimal legal formalities.
2. Low startup cost – no incorporation fees or complex registration.
3. Full control – the owner makes all business decisions.
4. Keeps all profits – no sharing with partners.
5. Flexible operations – can adapt quickly to changes.
6. Personalized service – direct contact with customers.
7. Confidentiality – no obligation to publish financial statements.
8. Simple taxation – profits taxed as personal income.
9. Strong owner motivation – direct link between effort and reward.
[Link] to dissolve – can close quickly without a lengthy legal process.
Disadvantages
1. Unlimited liability – personal assets at risk for business debts.
2. Limited capital – relies solely on the owner’s resources.
3. Limited expertise – one person must handle all functions.
4. Workload pressure – heavy responsibility on one individual.
5. Continuity risk – the business ends if the owner dies or is incapacitated.
6. Limited growth potential – harder to expand without partners or investors.
7. Difficult to attract talent – fewer career prospects for employees.
8. Credit limitations – banks may hesitate to lend large amounts.
9. Lack of checks and balances – decisions may be biased or rushed.
[Link]-dependence – success tied entirely to the owner’s ability.
Partnership
Advantages
1. More capital – combined resources of partners.
2. Shared workload – responsibilities can be divided.
3. Variety of skills – partners bring diverse expertise.
4. Shared decision-making – more balanced judgments.
5. Greater borrowing capacity – better creditworthiness.
6. Specialization is possible – each partner can focus on their strengths.
7. Motivation from shared ownership – joint interest in success.
8. Flexibility – fewer legal restrictions than corporations.
9. Simple taxation – income passed through to partners.
[Link] continuity – a partnership deed can allow a business to continue
after a partner leaves.
Disadvantages
1. Unlimited liability – all partners are personally liable (general partnerships).
2. Joint liability – responsible for the actions of other partners.
3. Profit sharing – earnings must be divided.
4. Potential for conflict – differences in opinions or vision.
5. Instability – may dissolve if a partner leaves, unless agreed otherwise.
6. Slower decision-making – consensus may take time.
7. Unequal contribution issues – resentment if effort or investment is
imbalanced.
8. Risk of one partner’s misconduct affects the entire business.
9. Transfer restrictions – cannot easily sell shares without agreement.
[Link] deadlock – disagreements can halt operations.
4. Comparative Benefits of Partnership Over Sole Ownership
Greater Resources: More capital and assets available.
Diversified Skills: Partners bring various expertise and strengths.
Workload Sharing: Partners can distribute tasks, reducing burnout.
Resilience: If one partner is unavailable, others can keep the business going.
Risk Sharing: Both financial and operational risks are shared.
5. Partnership Deed
Definition: A written (or even sometimes oral) agreement among partners
that outlines their mutual rights and responsibilities.
Key Contents:
o Names and contributions of partners (capital, assets, skills).
o Profit and loss sharing ratios.
o Roles, duties, and decision-making processes.
o Admission of new partners, withdrawal, and retirement terms.
o Procedures for resolving disputes.
o Conditions for dissolution or continuation on death/separation.
6. Types of Partners & Partnerships
Types of Partners
Active (Managing) Partner: Involved in day-to-day operations and decision-
making.
Sleeping (Sleeping) Partner: Invests capital but doesn’t participate in
management.
Nominal (Name-only) Partner: Lends their name but may not share profits
or management.
Limited Partner: Liability is limited to their investment; typically, passive.
Secret Partner: Active behind the scenes, but not publicly known as a
partner.
Partner by Estoppel: Not a formal partner but held out as one, thus liable
to third parties.
Types of Partnership Structures
General Partnership: All partners share liabilities and management duties;
full liability.
Limited Partnership (LP): Includes at least one general partner (full liability)
and one limited partner (liability limited to investment, usually not involved
in management).
Limited Liability Partnership (LLP): Partners have protection from personal
liabilities caused by other partners’ negligence; increasingly common in
professional services (law, accounting).
