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Business Studies Notes 3
rd.
Year
Undergraduate / Graduate Level
SUBJECT: How company
law and corporate
structures have
developed
Authors: (Original Study Notes and Lecture Notes prepared by Mr. K.P. Saluja (M.B.A. from Indian Institute of Management Ahmedabad), and by Mr. K. K. Prasad (M.B.A from IGNOU Delhi) These notes are intended to be used by undergraduate students, completing Year 3 Business Degree Courses. These notes will help undergraduates and graduates complete case studies, coursework assignments and pass exams in Business Studies and Economics.
TABLE OF CONTENTS
(1) Business Structures and their Advantages (2) common types of Business Structures (3) How to create a sole Proprietorship (4) Advantages of a sole Proprietorship (5) Disadvantages of a sole Proprietorship (6) Considerations while choosing a Business structure
Business Structures and their Advantages
One of the main moves toward consider while beginning a business is choosing which business structure to utilize. This choice can influence a few critical fundamental parts of a business, like as taxes and personal liability. There are a few well known structure types, so diving deeper into every one of them can
a sole ownership, you, as the proprietor, are responsible for every one of the business' monetary commitments, like debt and losses. This structure often works well for low-risk, home-based or retail businesses. A sole proprietorship also can allow an owner to test their business idea before creating a more formal company. Advantages of the sole proprietorship structure include the following, Complete control: As the sole owner, you have authority over all business decisions and don't need to consult with other partners, directors or shareholders like you do in other structures. Easier start up: Establishing a sole proprietorship business doesn't require you to fill out any forms or pay government fees. This can help simplify the process and make it cheaper to do. Simple tax reporting: Because the business legally isn't a separate entity, your personal income tax return includes the business' expenses and income. As an added benefit, you can use business losses to balance out the income you earned, which can lead to a higher tax return. Privacy: Sole proprietorships aren't required to file annual reports with state or federal governments. Therefore, the business won't be subject to the same public disclosure as it might be in other structures.
How to create a sole Proprietorship
While each state has various requirements for a sole proprietorship, coming up next are the means that most people take to frame this sort of business:
1. Choose what kind of business you want There are a few types of organizations that can benefit from being a sole proprietorship. Most people decide to begin their organizations as sole
ownerships and afterward convert the organization into a more complex organization as it grows. Instances of normal organizations/people that start as sole ownerships include: Day cares Freelance writers and editors Caterers Landscaping companies Tutors Consultants Fitness trainers Housekeepers Pet sitters Nannies Virtual assistants Determining which type of business you will have is the first step to starting a sole proprietorship.
2. Determine if a sole proprietorship is right for you Once you have decided on which type of company you will start, you can then determine if a sole proprietorship is the best option for your company. You should weigh the pros and cons of the various types of businesses you can have before deciding on which one is right for you. The most common business types include sole proprietorships; limited liability companies (LLCs), partnerships, cooperatives and corporations. Most small businesses begin as either a limited liability company or a sole proprietorship depending on their needs. 3. Determine your state's sole proprietorship requirements Each state shifts with regards to its necessities for running a sole ownership. You ought to ask about the means you really want to take to begin your organization in region, city and state prior to laying out your business. Most
Deciding to run a sole ownership can enjoy many benefits, particularly for small businesses. Coming up next is a couple of the advantages that deciding to begin a sole ownership can give: Free to start: Unlike other types of businesses, a sole proprietorship is typically completely free to start. This can be beneficial for individuals wishing to turn a side hustle into a more lucrative career or who do not have the funds to set up another type of business. Full control: Individuals who own sole proprietorships are the sole owners of the company and have the complete and final say as to how it is run. Control over all revenue: Unlike other businesses that may be required to make pay outs to lenders, investors and other organizations or individuals, a sole proprietorship does not have any financial obligations besides those incurred by the owner. Ability to use losses on personal tax returns: Individuals who own sole proprietorships are required to include the income and losses of the business on their personal tax returns. This means that the losses of the sole proprietorship can be used to offset other personal income for a higher tax return.
Disadvantages of a sole Proprietorship
While there are sure benefits that accompany beginning a sole proprietorship, there are likewise inconveniences to consider while choosing if a sole ownership is ideal for you. The following are a couple of possible impediments to remember while deciding whether this kind of business is your most ideal decision: Personally liable for lawsuits: Sole proprietors are personally responsible for all aspects of the company's financial situation. This means that if the company is
in debt and unable to pay lenders, the lenders can bring lawsuits against the individual who owns the sole proprietorship. If these lawsuits are settled in favour of the lenders, the business owner will be held personally responsible to pay for the debts. Limited options for raising capital: Whereas other types of companies can sell an interest in the business to raise capital, a sole proprietorship cannot. This can limit a sole proprietor's ability to bring in capital when it is needed. Higher taxes: Individuals who own sole proprietorships are responsible for paying the income tax and self-employment tax for the business's income. This can be a hefty fee if the sole proprietorship is successful. B. Partnership In a partnership business structure, two or more people own and operate the business. A partnership is one of the simplest structures for multi-owner companies or professional groups, and it allows owners to test a business idea before establishing a more formal company. There are two types of partnerships, which are general and limited. In a general partnership, partners have equal roles in owning and operating the company, along with its debts, other partners' actions or financial obligations. Some people refer to this type of business structure as a limited liability partnership (LLP). A limited partnership (LP) includes general and limited partners. The general partners have the same roles and liabilities as they would in a general partnership. The limited partners, who usually are investors, have limited control or input into the company and limited or no liability. Personal tax returns for the partners also reflect the business' profits. Advantages of a partnership structure include: Simple start up: Setting up a partnership doesn't require filing paperwork with the federal government, though there may be a few forms to fill with your state government.
Liability protection: Owners aren't responsible for a corporation's debts, so personal assets, such as a car, house and savings account, have protections. As an independent entity, a corporation can file and receive lawsuits, but you aren't liable for such legal actions. Business continuity: Corporations base ownership on the percentage of stock held, so the business can run without disruption even if a shareholder leaves or sells their shares. This also allows for more flexibility in transferring ownership. Quick capital: Corporations can raise funds by selling company stock and offering shares as employee benefits. This can help grow the business and support it in times of need. Tax exemptions: Although owners pay a double tax on business earnings, corporations can deduct certain benefits they provide to employees, such as retirement plans, health insurance premiums, life insurance and other related expenses. D. S corporation The S partnership business structure has the responsibility insurance of an organization alongside added tax reductions, making it more interesting to private companies. In any case, it should meet explicit IRS rules to be recorded as a S organization. This construction, otherwise called a S corps, has two principal constraints. It can't have in excess of 100 investors, and its investors should be US residents. S enterprises can sell just normal stock, which allows investors to choose the governing body and decision on organization approaches. Becoming an S corporation requires meeting eligibility requirements, having a single class of stock and having 100 or fewer stockholders. Advantages of the S corporation structure include:
No double taxation: Business profits and losses pass directly to the shareholders' personal incomes and appear on their tax returns. This means the S corporation has one level of federal tax to pay, and shareholders aren't subject to corporate tax rates. Liability protection: Shareholders in S corporations aren't personally responsible for the business's debts and liabilities. This lets them protect their personal assets, such as bank accounts or property, from creditors. Simple ownership transfers: S corporation is an independent entity, and shareholders can sell their shares without tax consequences. The business can also continue to run undisturbed when losing a shareholder, just as it does in a corporation. Cash method of accounting: Although a corporation must use the accrual method, S corporations without inventory can use the more simple cash method. In cash accounting, you record income when you receive it and expenses when you pay the invoice. E. Limited liability company A limited liability company (LLC) is a hybrid business structure that takes advantage of aspects of partnerships and corporations. To set up an LLC, you file paperwork with the secretary of state of the state in which you plan to do business. This structure works well if you have a medium- or high-risk business, want to protect your personal assets or pay a lower tax rate than you would with a corporation. Advantages of the LLC structure include: Limited liability: Because an LLC is an independent entity, you aren't personally responsible for debts or lawsuits against the company. If the business goes bankrupt, your personal assets have protections, though you may lose the money you invested in the business.
Flexibility: Try to review your goals and business plan, and then compare how each structure aligns with your plans. The structure should support growth and change, not limit its potential. Complexity: Sole proprietorship is the simplest business structure, but it might take more work for you to find outside funding. Partnerships require signed agreements for roles and profits, while corporations and LLCs must report to state and federal governments. Liability: A corporation has the least amount of liability because creditors or customers can sue the corporation but don't have access to your personal assets. Among the other structures, an LLC has the same protection and tax benefits, partnerships share liability between partners and sole proprietorships carry all financial liabilities. Taxes: Sole proprietorship and LLC owners pay personal income taxes, while partnerships claim their share of the profits as personal income. Corporations file their own tax returns, paying taxes on profits, but they also have more tax options and exemptions.
References
Black's Law Dictionary, 8th edition (2004), ISBN 0- 314 - 15199 - 0 e.g. South African Constitution Art.8, especially Art (4) Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993) has a very good discussion of the controversial nature of additional rights being granted to corporations. e.g. Corporate Manslaughter and Corporate Homicide Act 2007 In England the first joint stock company was the East India Company, which received its charter in 1600. The Dutch East India Company received its charter in 1602, but is generally recognized as the first company in the world to issue joint stock. Not coincidentally, the two companies were competitors. In England, see Edmunds v Brown Tillard (1668) 1 Lev 237 and Salmon v The Hambrough Co (1671) 1 Ch Cas 204
**Salomon v. Salomon & Co. [1897] AC 22. Although it did attach to documents within the husband's custody or control. Macaura v. Northern Assurance Co Ltd [1925] AC 619 Adams v. Cape Industries plc [1990] Ch 433 Goode Principles of Corporate Insolvency Law (3rd Edn, Sweet & Maxwell
Goode Corporate Insolvency Law (3rd Edn Sweet & Maxwell, 2013) 214 Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 Harlowe's Nominees Pty v. Woodside (1968) 121 CLR 483 (Aust HC) Foss v Harbottle (1843) 2 Hare 461 Gullifer and Payne Corporate Finance Law: Principles and Policy (2nd Edn Hart Publishing, 2015) 5- 41 Gullifer and Payne Corporate Finance Law: Principles and Policy (2nd Edn Hart Publishing, 2015) 38 Salomon v Salomon Janet Dine, Marios Koutsias Company Law (Macmillan International Higher Education 2014), 77 In England, see Ebrahimi v Westbourne Galleries [1973] AC 360 "Insider Trading | Investor.gov". www.investor.gov. Retrieved 2023- 03 - 26. Roman Tomasic, Stephen Bottomley, Rob McQueen, Corporation Law in Australia, Federation Press, 2002, pp.167- 173 "Designing an Effective Organization Structure". Bain & Company organizational toolkit and Bridge span analysis. Archived from the original on 23 April 2014. Retrieved 1 April 2014. "Organizational Structure: An Overview". Community Tool Box. Retrieved 1 April 2014. Huebsch, Russell. "The Vertical Structure Vs. the Horizontal Structure in an Organization". Demand Media. Retrieved 1 April 2014. Vitez, Osmond. "Organizational Structure". Demand Media. Retrieved 1 April
Archer, Clare. "Technology's Impact on Organizational Changes". Demand Media. Retrieved 1 April 2014.**
