Chapter

Legal Forms of Business Organizations

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

Useful web-links

http://en.wikipedia.org/wiki/Business http://en.wikipedia.org/wiki/Types_of_busine http://taxes.about.com/od/taxplanning/a/inco http://www.theamericancollege.edu/docs/14

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

Learning Goals
1. What are the three main forms of business organization, and what factors should a companys owners consider when selecting a form? 2. What are the advantages and disadvantages of sole proprietorships? 3. Why would a new business venture choose to operate as a partnership, and what downside would the partners face?
BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006 3

Learning Goals (contd)

4. How does the limited liability structure provide advantages and disadvantages to a company and its owners? 5. Does a company have any business organization options besides sole proprietorship, partnership, and corporation?

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

Introduction
ifferent approaches concerning forms of business organizations: ommon Law countries use the term company for limited liability companies and corporations ivil Law countries use more formalities for the registration of companies the term is used almost for all forms of business, besides sole proprietorships (but even these have to be BUSINESS 5 registeredLAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006 in public register)

Learning Goal 1
What are the three main forms of business organization, and what factors should a companys owners consider when selecting a form?

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

Business Organizations
1. Sole proprietorships 2. Partnerships 3. Corporations

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

Comparisons of Forms of Business Organizations

Num ber

Sales

P rofits

Sole proprietorships Partnerships Corporations

Factors in Choosing a Business Organization

Owners liability for firms debts Ease and cost of forming the business Ability to raise funds (sources of capital) Taxes Management and control Ability to attract employees Flexibility in choosing activities Lifecycle and continuity Transferability of ownership
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Learning Goal 2
What are the advantages and disadvantages of sole proprietorships?
Facts: 75% of all businesses in the world 90% of all SPs are one person businesses 3 types of SPs internationally classic SP, individual enterprise, farmers
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Sole Proprietorships
Advantages Easy and inexpensive to form Owners right to all profits Direct control of the business Freedom from government regulation No special taxation Ease of dissolution Disadvantages Unlimited liability Difficulty in raising capital Limited managerial expertise Difficulty finding qualified employees Personal time commitment Unstable business life Owner absorbs all loses
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BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

Learning Goal 3
Why would a new business venture choose to operate as a partnership, and what downside would the partners face?
Facts: the most unpopular in the world highly popular for specific types of businesses
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Partnerships
General Partnerships
Partners co-own assets and share profits Each partner is individually liable for all debts and contracts of the partnership

Limited Partnerships
Controlled by one or more general partners who have unlimited liability Partners liability is limited to their investment Do not participate in the firms operations

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Partnerships
Advantages
Ease of formation Availability of capital Diversity of skills and expertise Flexibility No special taxes Relative freedom from government control

Disadvantages
Unlimited liability for general partners Potential for conflict between partners Sharing of profits Difficulty in leaving or ending a partnership

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Partners duties
not to make a secret profit; not to compete with the partner; to serve the partnership; to exercise the skill and care of the ordinarily prudent business manager; to act within the actual authority; to account for the use and disposal of partnerships funds and property;

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

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Partners duties
to indemnify other partners for expenditures they made from their personal funds and for liabilities they incurred on behalf of the partnership; to maintain the confidentiality of partnership information; to disclose to other partners information material to the partnership business; to inform partners of notices he has received.
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Types of partners
General partner, Limited/special partner, Silent partner, Secret partner, Dormant partner (silent + secret), Ostensible partner (estoppel), Sub-partner.

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

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Learning Goal 4
ow does the limited liability structure provide advantages and disadvantages to a company and its owners?

acts: LC in civil law countries are the most popular

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Corporation / Limited liability company:

a legal entity with an existence and life separate from its owners, who therefore are not personally liable for its debts; it can own property, enter into contracts, sue and be sued, and engage in business operations

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

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The Formation Process

1. Select the companys name 2. Write and file the articles of incorporation / bylaws / statute / constitution 3. Pay fees and taxes 4. Hold the general organization meeting 5. Adopt bylaws, elect directors, and pass operating resolutions
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Types of Limited Liability Companies

Private Limited Company (LLC, Closed type Joint Stock Company, S-type Corporation) A corporation that does not trade publicly and, therefore, is not listed on a stock exchange. Public Limited Company (Open type Joint Stock Company, C-type Corporation) A corporation that has the right to issue shares to the general public and is listed on a stock exchange.
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Corporations
Shareholders (General Meeting) own the corporation can sell or transfer shares receive profits in the form of dividends Board of Directors (Supervisory Board) elected by the shareholders govern the firm Officers top management that carry out the goals and policies of the board of directors
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Corporations
Advantages
limited liability easy of transfer ownership unlimited life-span ability to attract financing ability to attract potential employees

Disadvantages
double taxation of profits cost and complexity of formation more government regulations and restrictions

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Rights of shareholders
Participation; Voting (straight, cumulative, class, by agreements, by proxies); Preemptive; Inspection of financial records; Meetings; Suits; No liability for companys obligations.

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

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Crown Corporations / Public Monopolies

Companies that only the provincial and federal governments can set up. Examples:
Public Post Companies Public Medical Services Weaponry Manufacture and Export Money Printing Public Utilities Gambling
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Natural Monopolies
ompanies that legally received the status of the monopoly and are legally protected from competition.

xamples:
Air Traffic Services Utilities (Gas, Electricity, Water, Garbage) Telephone companies 26 BUSINESS LAW INcompanies PLACE, by Peter Nayler 2006 Railroad THE GLOBAL MARKET

Learning Goal 5
Does a company have any business organization options besides sole proprietorship, partnership, and limited liability company/corporation?

BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

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Specialized Forms of Business Organizations

Cooperatives
a legal entity collectively owned by individuals or businesses with similar interests profits distributed to the members in proportion to their contributions

Franchises Groups of companies

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Franchising:
a business organization in which a franchisor supplies the product concept to the franchisee, who sells the goods or services in a certain geographical area

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Franchises
Advantages
increased ability for franchisor to expand recognized name, product and operating concept management training and assistance for franchisee financial assistance for franchisee

Disadvantages
loss of control for franchisor costs of franchising restricted operating freedom for franchisee

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Top 10 Franchises for 2009

Source: www.franchisegator.com

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Subway Liberty Tax Service Ace Hardware Hardees's Supercuts Pizza Hut Kumon UPS Express Employment Professionals Sport Clips
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BUSINESS LAW IN THE GLOBAL MARKET PLACE, by Peter Nayler 2006

Groups of Companies / Financial Groups

Used globally by large businesses (car manufacture, oil extraction, insurance, banking) The concept of limited liability is the main reason for its success Although the piercing of the corporate veil limits bad faith operations

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Global Tax Avoidance Methods used by Groups of Companies:

Tax havens Transfer pricing
Usage of states providing tax refuge Charging arbitrary prices for goods or services provided by one affiliate company to another affiliated company so as to lower the tax burden of the overall enterprise

Treaty shopping Thin capitalization

Usage of international treaties to avoid taxation A company is purposely financed by loans rather than by equity capital (artificial businessby Peter Nayler 2006 expenses) BUSINESS LAW IN THE GLOBAL MARKET PLACE, 33

Trends in Business Organization

Franchises catering to niche markets Increased consolidation through mergers and acquisitions Increased cross-border mergers

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Benefits of Mergers
combined cost savings elimination of overlapping services improved purchasing power increased market share reduced competition

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