Article XI Legal awareness of Contractual Documentation required for Business Enterprise Expansion and Growth.
Business Structures
In my previous series, we have
done an analysis of the various stages through which a business organization goes
through in its evolution journey.
Hereafter we shall focus on
various types of business structures, industries in which an Entrepreneur
operates, and the legal provisions that an Entrepreneur needs to understand and
incorporate in contractual documentation to protect his/her interests in the
best possible manner.
The choice of business structure
for any start-up has a long-lasting effect on the way in which it is run, its
operations, hiring of employees, renting of business place, tax considerations, and so on. As a start-up entrepreneur, you need to analyze all the above aspects
before starting a business.
Most Popular Types of Business Structures
There are various types of organizations
we come across in an economy. Their structures depend upon the nature of the business, the quantum of capital
invested, human resources involved, territorial boundaries of operations, and
many other factors. However, normally we find the following seven types of
Business Structures across any industry:
·
Sole Proprietorship
·
General Partnership
·
Limited Partnership (LP)
·
Corporation
·
Limited Liability Company (LLC)
·
Non-profit Organization
·
Cooperative (Co-op)
1. Sole Proprietorship
This is a “One Man Show”, owned
and run by a single person. Generally, a sole proprietorship does not require any
specific registration. However, to meet local requirements and depending upon
your products /services and the territory in which you provide them, you may
need to obtain certain local permits.
Here there is no distinction
between “business and businessman “both are the same. So, YOU as an owner, own and
account for all of the profits, liabilities, losses, and also for any legal
issues that may arise.
This is the most popular way of
doing business primarily when you are a “Start-up” due to the simplicity of its
creation and operations.
2. General Partnership
When two or more people come
together to share their business, responsibilities, and profits a general partnership is formed. This results
in many advantages such as more resources, knowledge sharing, more private
funding, and so on. In a general partnership responsibilities and liabilities
are usually split equally amongst each member.
A General Partnership business is
more beneficial in comparison to a Sole Proprietorship business in terms of
team efforts, commitment, and division of risk.
3. Limited Liability Partnership (LLP)
A Limited Liability Partnership,
or LLP, is a sub-type general partnership. Normally accountants, lawyers, consultants, and architects form LLPs. In this type of partnership, there are two types of
partners General Partner and the Limited Partner. The General Partner is
usually involved in everyday business decisions and has personal liability
for the business. The Limited Partner (typically an investor) is involved in
the company’s day-to-day management. The Limited Partner is not liable for
debts and his/her liability is limited to the amount invested. A Limited
Partner doesn’t partake in regular business management of the LLC. The preconditions
for forming this type of business structure are- 1) the existence of an official
business name, 2) obtaining required business licenses 3) registration of the
business in the State in which it is operated, which will provide additional
protection.
4. Company
A company is a corporation formed
by a group of persons. A company is an “Artificial Person” created under the law
and exists independently. It is distinct from its owners, managers, and
employees. The persons who come together to form the Company are shareholders
who contribute to the stock in the Company.
A company can be a Private
Limited Company, or a Public Limited Company based on the ownership structure,
number of members, rules, and regulations for operating, etc.
Accordingly depending upon the above
classification, a particular company may need to comply with various rules and
regulations as applicable to it.
5. Limited Liability Company (LLC)
This is a
mixture of partnership and corporation and is a popular organizational
structure amongst new start-ups. Here the members are referred to as “Owners”
instead of “shareholders” as in a corporation. A “Managing Member” is selected
from amongst the members, based on requirements, to look after the day-to-day
activities of the organization. Here
members are personally accountable for the organization.
LLC members are not personally liable for business
decisions or actions of the company in question, and there's far less paperwork
involved in creating an LLC as compared to a corporation. LLCs are most common amongst
online businesses since they allow small groups of people to easily form a
company together.
6. Non-profit Organization
These are the
organizations that are normally set up to promote educational or charitable initiatives.
Here “non-profit" means that any funds collected are used for paying the
organization’s expenses, funding the initiatives and programs, etc.
These
organizations need to get themselves registered with required government
agencies to avail of various benefits and exemptions under tax and other statutes.
7. Cooperative
Cooperatives are businesses owned
and operated for the benefit of the members of the organization that uses its
services. As such, whatever is earned by the Cooperatives is shared amongst the
members of the organization.
Cooperatives allocate the funds to
their members, who then have a say in the working and operations of the Cooperative.
Also, cooperative shareholders sell shares to cooperative “members” who then
participate in the working of the Cooperative. All Cooperatives are normally
run by rules and regulations framed by them.
For any query feel free to contact me.
Mahesh Vaidya
M.Com, LLM, ACS, DFM, CAIIB
Legal Adviser
Cell Number 9769949701 / 9223173695
Email ID maheshvaidya2706@gmail.com
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