Introduction
There are many companies in the world, and people work in each one differently. Some people work alone, while others collaborate with a large group of people. Various working styles have become more prevalent in recent years. There are primarily two company management styles in our environment, and few people can explain the differences between them. What distinguishes them?
Difference between sole proprietorship and corporation
Sole proprietorship
An unincorporated individual becomes the owner of all businesses, operates them, and manages them. This is the most straightforward business, beginning when the proprietors decide and ending when they die (Lip, 2022).
Types of sole proprietorship
- Self-employed business owner
A self-employed person is someone who runs a business for profit. The self-employed person has no contractual relationship with the customer or client. In their spare time, they can work (Loseph, 2010).
- Independent contractor
This is also a self-employed sole proprietorship, but it operates as an employee. Despite the fact that they are employed, no taxes are deducted from their pay, and they do not receive benefits such as health insurance. They can choose whether or not to accept the assignment (Loseph, 2010).
- Franchise
A type of management in which a sole proprietor (franchisee) pays a commission to the franchisor in exchange for the use of the company’s brand. While managing operations, marketing, pricing, and so on, the franchisee must also pay the franchisor’s royalties (a percentage of total franchise sales). Franchises are appropriate for sole proprietors who have little business experience (Loseph, 2010).
There are many sole proprietorships in business, such as a booking-keeping company, a financial planner, a home care provider, a virtual assistant, a freelance writer, catering company management, private house cleaning, and so on (Johnson, 2019).
Corporation
A company established by individuals or shareholders to conduct business for profit is called a corporation.
Businesses are allowed to:
- sign contracts
- file lawsuits
- own assets
- pay taxes
- borrow money from financial institutions
Companies can be formed with documentation outlining their purpose, name and location, number and types of shares, and so on. Incorporation prevents the owner from being solely responsible if something goes wrong.
Shareholders form corporations in order to achieve a common goal. For-profit and non-profit organizations are the two types of legal entities (CFI team, 2022).
- For profit entities
It forms the bulk of the enterprise. The goal is to make a profit and return it to shareholders (CFI team, 2022).
- Non-profit entities
They operate under associations dedicated to specific purposes such as education, religion, or science. Proceeds are used for further purposes and are not distributed to shareholders (CFI team, 2022).
Characteristics of a sole proprietorship
(Advantages and disadvantages)
Advantages
- Easiest and cheapest to start
It is a less risky way to start a business because the amount of paperwork that owners have to submit to local authorities is less and it does not cost much to start (Lip, 2022).
- The number of government rules and laws are less
Fewer laws or regulations apply to sole proprietorships compared to large companies. They must keep records and information and pay taxes on their income (Lip, 2022).
- Full management control
All departments of the business, such as production, sales, personnel, and so on, are controlled by proprietorships. Therefore, owners must have good competence and responsibility for the business (Lip, 2022).
- Flow-through of business profit
Because there is no legal separation between the owner and the business, owners can reap all of the benefits. Taxes are paid all at once, and owners pay them separately. Owners must pay income taxes on a regular basis in order to file personal tax returns. As a result, the tax burden rises, but a tax accountant can assist with tax estimates (Lip, 2022).
Disadvantages
- Have many legal responsibilities
When something goes wrong, the owners are responsible for all liabilities and obligations (Lip, 2022).
- Limited available capital
Starting a business necessitates a substantial investment. Owners have limited financial and credit resources. They cannot raise funds by selling company stock or paying interest, so they must plan ahead of time for things like managing working capital and reducing fixed assets (Lip, 2022).
- Backup and succession
Owners have the ability to halt the operation of their company. In this case, interruption insurance will kick in, allowing the temporary cost problem to be resolved.
It is difficult to transfer to another owner because the value of a business is tied to the owner. If their business is disrupted, they can find someone with similar skills or even delegate the job to a trusted employee or family member (Lip, 2022).
- Skills and experiences
Owners must have sufficient knowledge and experience to make sound decisions. It is difficult to manage alone, so they must consider how to hire employees and obtain outside assistance and advice. It is critical for business owners to develop the ability to use their time wisely in order to maximize profits while also considering the cost of hiring help (Lip, 2022).
Characteristics of a corporation
(Advantages and disadvantages)
Advantages
- Lasts forever
Even if the owner dies or becomes unable to work, the corporation will not cease to exist. In this case, only the charter of the company is changed, and the company can continue after that (CFI team, 2022).
- Limited liability
Owners are only responsible for the amount invested. Corporate debt is not passed on to shareholders either (CFI team, 2022).
- Easy transfer of ownership
Shares and ownership rights can be transferred to other shareholders without public approval (CFI team, 2022).
- Competent management
Owners and investors are often not directly involved in management. They hire professional managers to manage their business (CFI team, 2022).
- Source of capital
Raise funds by selling stocks and issuing bonds (CFI team, 2022).
Disadvantages
- Expensive and difficult to get started
It is difficult because the cost of establishment is high and there are many documents that must be submitted (CFI team, 2022).
- Double taxation
First, corporations pay income tax on their earnings. Moreover, as dividends to investors, they have to pay income tax on the dividends they receive (CFI team, 2022).
- Need to maintain documentation
Apart from the documents to start the corporation, owners must file an annual report and a tax return. In addition, they need to keep accounting records, licenses, and other important documents (CFI team, 2022).
Conclusion
There are significant differences between sole proprietorships and corporations, each with their own set of benefits and drawbacks. Despite the fact that their business structures and responsibilities are vastly different, both are supported by other companies and employees. Applying methods that are better suited to the owners and their profession when starting a business will help the company succeed.
References
CFI team (2022). Corporation. [online] Corporate Finance Institute. Available at: <https://corporatefinanceinstitute.com/resources/accounting/what-is-corporation-overview/#:~:text=A%20legal%20entity%20created%20by> [Accessed 25 November 2022].
Johnson, R. (2019). 10 Examples of Sole Proprietors. [online] Small Business – Chron.com. Available at: <https://smallbusiness.chron.com/10-examples-sole-proprietors-32858.html> [Accessed 24 November 2022].
Lip, G. (2022). Sole Proprietorship. [online] Corporate Finance Institute. Available at:
<https://corporatefinanceinstitute.com/resources/management/sole-proprietorship/> [Accessed 24 November 2022].
Loseph, C. (2010). Types of Sole Proprietorship. [online] Chron.com. Available at: <https://smallbusiness.chron.com/types-sole-proprietorship-4445.html>[Accessed 24 November 2022].
