Private added credibility eases the process of

Private limited Companies

 

Advantages

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Legal Personality – A private limited
company is a separate legal entity which is separate from its owners. This
enables a company to enter into contracts, to sue and be sued in its own name
and also enables a private limited company to own property.

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Limited liability – the liability of
owners extend only up to the amount of capital they have invested thus securing
their personal belongings. In this manner shareholders receive legal protection
since only their investment is at risk.

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Ease to gather finance – a private limited
company may issue shares among friends and family and thereby able to gather
more capital compared to sole proprietorships and partnerships. The added
credibility eases the process of obtaining debt capital from financial
institutions.

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Perpetual Succession – a private limited
company is said to have unlimited life since its existence does not cease with
the death or resignation of a shareholder or director.

 

 

Disadvantages

 

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Complexity in formation – unlike sole
proprietorships and partnerships private limited companies require a formal
procedure to set up which requires legal documentation, quite a bit of finance
and is a time consuming process thus making the formation more complex.

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Restriction on transfer of shares –
shares cannot be freely transferred in a private limited company and the
maximum number of shareholders are limited to a certain number. Unlike public
limited companies a private limited company is also restricted to issue shares
to the public thus not granting them access to be listed in the stock exchange
of the relevant country.

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Conflicts among the Board of directors and
shareholders – a private limited company customarily faces a conflict of
interest between the BOD and the shareholders due to the mismatch of their
needs.

 

Discussion of a Partnership

Advantages

Convenient
to establish – start-up costs are low and more
capital is available for the business.
Profit Sharing- Opportunity for
income splitting, an advantage of particular importance due to resultant
tax savings.
Legality-it’s easy to
change your legal structure later if circumstances change
Direct investment- Investment can
be raised from each partner in a negotiable manner
Privacy- Business
dealings are kept between partners and do not have to made known to other
parties.

 

Disadvantages

·   
Unlimited
liability- of the partners for the debts of the business is unlimited
.Each partner is ‘jointly and severally’ liable for the partnership’s debts;
that is, each partner is liable for their share of the partnership debts as
well as being liable for all the debts

·   
Disagreement-A risk of
disagreements and friction among partners and management.

·   
Consolidation
of assets- If the business is not successful, between partners there
are less restriction to consolidate assets. If partners join or leave, you will
probably have to value all the partnership assets and this can be costly.

 

 

 

Recommendation

 

Considering the above pros and cons in my opinion I would
suggest Fernando and Perera to start their restaurant business in the form of a
partnership. It is always recommended to start off proceedings on a small scale
and later expand their business once they have established a brand name and a
regular customer base ensuring long term existence of the restaurant. The ease
to start a partnership when compared to the complex formation procedure of a
private limited company is also an influencing factor to form a partnership for
the above business proposal. Partnerships are exempted from paying cooperate
taxes as taxes are only personally paid by partners thus avoiding a double
taxation which emerge in private limited companies resulting in a tax saving. A
partnership is also free from complex laws that regulate its activities unlike
private limited companies.
Considering that two individuals in this scenario wish to run a restaurant
given the nature and the size of the company and because it involves two
individuals, it would be efficient for the owners to create a partnership as it
limits the legality of the entity and assumes much more control and responsibility
from the partners over the business. Furthermore the profit sharing would be
greater and fairer based on the partnership agreement maintained between the
two individuals.
Thus it is quite evident that the formation of partnership by Fernando and
Perera to start up their restaurant is a better option than forming a private
limited company.