Essay Example on Explain to them the strengths and weaknesses of partnership and Limited Company

Question 1 Fernando and Perera would like to start a restaurant business in Colombo Knowing that you are learning accounting they approach you for suggestions as to the type of business ownership to be established Explain to them the strengths and weaknesses of partnership and limited company and provide your recommendations with supporting reasons Business ownership is very important for accounting purposes and there are three main types of business ownerships and strengths and weakness of each They are Sole proprietorship Partnership Limited Company Sole proprietorship Just as the name suggest it is a business owned by a single owner These types of businesses are much easier to set up since there are no formal procedures to be followed and most of them are small businesses Although these types of ownerships are advantageous for small businesses in service industry like the restaurant business there are some risks come with it For example in this type of ownership both the owner and the business is considered a one single entity Thus the owners personal wealth may used to cover debts incurred by the business Considering both Fernando and Perera would like to start the business together this type of ownership would not suit them as name suggest sole proprietorship is a business owned by a single owner Partnership 

A partnership is an ownership model exists where more than one or more individuals carry on a business to make a profit These type of business have much in common with sole proprietorship as they are usually small in size and there are no special set of formal procedures to be followed when starting them In these type of ownership partners can agree whatever arrangement suit them in financial and management aspects But just like the sole proprietorship the business have an unlimited liability Advantages Easy to set up manage and run because they are less regulated More partners there are more capital that can be put in to the business Partners can share the responsibilities among themselves Disadvantages Danger of disagreement among the partners Because it's necessary the partners agree to certain decisions taken by other partners it s less flexible compared to sole proprietorship It s subjected to unlimited liability Inconsistency in equal profit sharing because one or more partners putting more efforts into the business Limited Companies Limited liability company is simply a company where liability is limited 

These type of companies can be quiet small or very large where unlimited number of individuals can become owners which provide the opportunity create a large scale business In these company owners are liable only to the debt incurred by company up to the amount they agree to invest This is designed to boost confidence of the investor and usually owner won't involve in day to day activities of the company but done by a board of directors There are two types of limited Liability companies 1 Public Limited Companies Companies established with at least two shareholders and at least with 50000 pounds in shares 2 Private Limited Companies Companies that can run with one member but cannot trade shares to public to raise capital Advantages Limited Liability It s considered the business is a separate entity from the owner They are only taxed on their profits Decisions can be taken easily Employees can also be shareholders in some instances Disadvantages There are many complex rules and regulations set by governments to regulate limited companies 

For Private Limited companies there is restrictions to raise capital via sale of shares Because nature of limited companies there will be disputes among directors and shareholders Since both Fernando and Perera would like to start a restaurant business in Colombo which is a small business in service sector partnership would be much preferable to limited company because It is much easier to set up compared to a limited company More flexible concerning the way business is conduct There is no administrative burdens by law Simplify the taxes because it passes down to owners Question 2 Discuss THREE main distinctions differences between Financial Accounting and Management Accounting 1 Nature of reports produced In financial accounting the reports are produced not targeting the need of a special group or specific decision Rather it is designed to be useful for a broad range of users But in management accounting reports are made targeting a specific decision and a particular manager 2 Level of Details in reporting In financial accounting reports give details of a broader view on the performance and position of the business in a certain period But in management accounting reports gives details for managers to help them regarding a particular operational decision 3 Reporting Interval For most businesses financial accounting reports are made annually While management accounting reports may be produced more often as possible by managers