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Choosing the type of business ownership is a very important aspect of starting a business as it determines various legal and operational issues that affect a business. There are many types of business ownerships that can be established when starting the restaurant business. The most suitable kind of ownership for this will be either a partnership or a limited company. Both have their strengths and weaknesses, which I have stated below.
A partnership is where the ownership of the business is shared among two or more individuals.
The income earned by the business will directly go to the partners. The partners will be able to divide the entire profits among themselves as they do not have to pay taxes in the name of the partnership. This avoids the double taxation issue, where a business will be taxed and then the owners will again be taxed on the profits received by them.
There aren’t many legal requirements to be fulfilled when starting a partnership. It is not even compulsory to have a partnership agreement, although it is better to have one.
There doesn’t have to be any particular governing structure. The partners themselves can decide how they want to govern the business. They can choose a centralized structure or a completely decentralized structure which allows all the partners to actively participate in management.
Less expensive to form and require less formalities and paperwork. Business decisions can be taken by discussions among the partners itself. The weaknesses of a partnership can be stated as follows.
Partners are personally liable for business debts and liabilities. If the business goes bankrupt, the partners will have to somehow pay off any remaining debt and liabilities using their personal properties. Each partner is also liable for debts incurred by the actions of another partner.
There can be instances where a partnership may not be that stable as one partner’s actions itself can lead to the partnership being dissolved. Death, bankruptcy or resignation of a partner my lead to the business being unexpectedly dissolved. When it comes to a limited company the advantages that can be gained are as follows.
The term ‘limited’ gives the company more esteem and makes the company seem bigger, which will help to attract more investors and customers. Also, suppliers and other businesses are more willing to deal with a limited company because of the professional image.
In a limited company, the shareholders cannot be held personally liable for the company’s debts and liabilities. The financial liability of each shareholder for the company’s debts is limited to the value of his/her initial investment.
Limited companies are subjected to lower tax levels than the personal tax rates placed on partnerships.
As the limited company is considered as a separate legal entity, it will survive beyond the existence of its original owner. However, a limited company has the following disadvantages.
A limited company is required to submit more accounting information than a partnership. They will have to be more concerned about accountancy because of this.
A limited company has more legal obligations than a partnership. They are required to go through more legal procedures and submit more legal documents.
Establishing a limited company can becostly as there are a lot of requirements to be fulfilled.
After considering the above pros and cons of both partnerships and limited companies, my recommendation would be that unless you have sufficient capital and necessary resources and are prepared to face the risk and responsibility of starting a limited company, it is better to go for a partnership initially. After developing it step by step you can upgrade it to a limited company when you have earned enough capital, resources and experience.
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