Download WHAT IS BUSINESS/TYPES AND FORMS

Business is the ‘holding out’ by an Individual or a
group for a mission – Legal/Illegal.
2. A business (typically called company, enterprise or
firm) is a legally recognized organization designed
to provide goods and / or services to consumers.
3. Most businesses are formed to earn profit that will
increase the wealth of its owners and grow the
business itself. Exceptions however are cooperative enterprises and state owned enterprises.
4. Business can also be formed not – for – profit.
1.
ETYMOLOGY
The term ‘business’ relates to
the state of being busy either
as an individual or society as
a whole, doing commercially
viable and profitable work.
USAGE OF TERM
Singular Usage – Refers to a particular company or
Corporation.
2. Market Sector Usage – Refers to a particular market
sector, such as “the music business”, “the Hosiery
business”, etc. or compound forms such as
“agribusiness”. (also referred to as general or
industrial usage).
3. Broadest Usage – This includes all activity by the
Community of Suppliers of goods and services.
1.
CLASSIFICATIONS
Business may be classified in many ways but are
generally classified by industry or by primary profit
generating activity.
Examples:
Agriculture and Mining Businesses: These are
concerned with the production of raw materials, such
as plants or minerals.
Financial Service Businesses: These include banks and
other financial institutions and markets that generate
profit through investment, lending and management
of capital
CLASSIFICATIONS
Information
Businesses: They generate profits
primarily from the resale of intellectual property and
include movie studios, publishers and packaged
software companies.
Manufacturing: They produce products, from raw
materials or component parts, which they then sell at a
profit. Companies that make physical goods, such as
cars or pipes are considered manufacturers.
Real Estate Businesses: These generate profit from the
selling, renting and development of properties, homes
and buildings.
CLASSIFICATIONS
 Wholesaling
Businesses: These are ‘bulk breakers’
intermediating between Manufacturers and Retailers.
 Retailers and Distributors: They act as middle-men in
getting goods produced by manufacturers to the intended
consumer, generating a profit as a result of providing sales
or distribution services. Most consumer-oriented stores
and catalogue companies are distributors or retailers.
 Service Businesses: They offer intangible goods or services
and typically generate profit by charging for labor or other
services provided to government, other businesses or
consumers. Organizations ranging from house decorators
to consulting firms to restaurants and even to entertainers
are types of service businesses.
CLASSIFICATIONS
Transportation Businesses: These deliver goods and
individuals from location to location, generating a
profit on the transportation fares or charges.
Utilities: They produce public services, such as heat,
electricity or sewage treatment, and are usually
government chartered.
There are many other divisions and subdivisions of
businesses. The authoritative list of business types for
North America for example is generally considered to
be the North American Industry Classification System,
or NAICS.
BUSINESS FORMS
1. Forms of business vary by jurisdiction.
Business forms are generally a function of
ownership. Thus how the business is owned.
2. Most legal jurisdiction specify the forms of
ownership that a business can take, creating a
body of business association laws for each
type.
3. The following business forms are common in
most of the “Free World”.
BUSINESS FORMS
Sole Proprietorship: A Sole
Proprietorship is a business owned
by one person. The owner may
operate on his or her own or may
employ others. The owner of the
business has personal liability of
the debts incurred by the business.
BUSINESS FORMS
Partnership: A partnership is a form of
business in which two or more people
operate for the common goal which is often
making profit. In most forms of partnership,
each partner has personal liability of the
debts incurred by the business. There are
three typical classifications of partnerships:
general
partnership,
limited
partnerships, and limited liability
partnerships.
BUSINESS FORMS
Corporation: A corporation is either
a
limited or unlimited liability entity that has
a separate legal personality from its
members. A corporation can be organized
for-profit or not-for-profit. A corporation is
owned by multiple shareholders and is
overseen by a board of directors, which hires
the business’s managerial staff. In addition
to privately-owned corporate models, there
are state-owned corporate models.
BUSINESS FORMS
Cooperative: Often referred to as a “co-op”, a
cooperative is a limited liability entity that can
organize for-profit or not-for-profit. A
cooperative differs from a corporation in that it
has members, as opposed to shareholders, who
share decision-making authority. Cooperatives
are typically classified as either consumer
cooperatives
or
worker
cooperatives.
Cooperatives are fundamental to the ideology
of economic democracy.
BUSINESS FORMS IN UK/COMMONWEALTH
– GHANA COMPANIES CODE 1963, ACT 179
LIMITED COMPANY
A limited company in the United Kingdom
and the commonwealth is a corporation
with shareholders whose liability is limited
by shares (Ltd), which is the most common
form of privately held company. Setting up
as a limited company is an attractive option
for many people as, unlike sole traders,
personal assets are completely distinct from
company finances.
BUSINESS FORMS IN UK/COMMONWEALTH
LIMITED COMPANY (Cont.)
The private company equivalent in Australia
is the Proprietary Limited Company (Pty
Ltd). An Australian company with just
Limited or Ltd at the end of its name is a
public company, such as a company listed
on the ASX (although public companies
can be, and often are, unlisted). Australia
doesn’t have a direct equivalent to the plc.
PRIVATE COMPANY LIMITED BY GUARANTEE
This type of Company does not have share
capital but is guaranteed by its members,
who agree to pay a fixed amount in the
event of the company’s liquidation.
Frequently charities incorporate using this
form of limited liability. In Australia only
unlisted public company can be limited by
guarantee.
PRIVATE COMPANY LIMITED BY SHARES
It has shareholders with
limited liability and its
shares may not be offered to
the general public.
PUBLIC LIMITED COMPANY (PLC)
Public limited companies can be publicly traded on a stock
exchange – similar to the U.S. Corporation (Corp.) and the
German Aktiengesellaschaft (AG).
A shareholder in a limited company, in the event of its
becoming insolvent (equivalent to bankruptcy in the US)
would be liable to contribute to the amount remaining
unpaid on the shares (usually zero, as most shares are
issued fully paid). ‘Paid’ here relates to the amount paid to
the company for the shares on first issue, and not to be
confused with amounts paid by one shareholder to another
to transfer ownership of shares between them. A
shareholder is thus afforded limited liability.
UNLIMITED COMPANY
An unlimited company or private unlimited company is a
hybrid company incorporated either with or without a
share capital (and similar to its limited company
counterpart) but where the liability of the members or
shareholders is not limited – that is, they are liable to
contribute whatever sums are required to pay the
outstanding debts (if any) of the company should it ever go
into formal liquidation and its assets are insufficient to pay
its debts and liabilities and the expenses of liquidation. In
that situation, the members or shareholders are liable for
the shortfall. As with its counterpart the limited company,
its members or shareholders have no direct liability to the
creditors of an unlimited company.
UNLIMITED COMPANY (Cont.)
An unlimited company has the benefit and status of
incorporation same as its limited company
counterpart. Situations where an unlimited company
will be preferred to an alternative business model or
its limited company counterpart include:
Secrecy concerning financial affairs is desired,
effectively shielding its financial affairs from its
competitors and making them non-public information
including shareholder dividend payments: a United
Kingdom unlimited company, unlike its limited
company counterpart, is generally not required to
publish or make public its company financial
statements.
UNLIMITED COMPANY (Cont.)
The company is trading in an area where limited
liability is not acceptable, vital or practical.
There is no risk of insolvency.
The company or its trading activities has or
generates sufficient capital, funds or financing
without need to approach general lenders such as
high-street retail banks.
Community
company.
interest
company/not-for-profit
BUSINESS FORMS IN THE UNITED STATES
S corporation
An S corporation, for United States federal income tax purposes,
is a corporation that makes a valid election to be taxed under
Subchapter S of Chapter 1 of the Internal Revenue Code.
In general, S Corporations do not pay any income taxes. Instead,
the corporation’s income or losses are divided among and passed
through to its shareholders. The shareholders must then report
the income or loss on their own individual income tax returns.
This concept is called single taxation; if the corporation is taxed
as a C Corporation, it will face double taxation. Meaning both
the corporation’s profits, and the shareholder’s dividends, will be
taxed.
S CORPORATION (Cont.)
In order to make an election to be treated as an S
corporation, the following requirements must be met:
 Must be an eligible entity (a domestic corporation, or a
limited liability company).
 Must have only one class of stock.
 Must not have more than 100 shareholders.
 Spouses are automatically treated as a single shareholder.
Families, defined as individuals descended from a common
ancestor, plus spouses and former spouses of either the
common ancestor or anyone lineally descended from that
person, are considered a single shareholder as long as any
family member elects such treatment.
S CORPORATION (Cont.)
Shareholders must be U.S. citizens or residents, and
must be natural persons, so corporate shareholders
and partnerships are generally excluded. However,
certain trusts, estates, and tax-exempt corporations,
notably 501(c)(3) corporations, are permitted to be
shareholders.
Profits and losses must be allocated to shareholders
proportionately to each one’s interest in the business.
C CORPORATION
C corporation
A C corporation (or C corp.) is a corporation in the
United States that, for Federal income tax purposes, is
taxed under 26 U.S.C. § 11 and Subchapter C (26 U.S.C.
§ 301 et seq.) of Chapter 1 of the Internal Revenue
Code. Most major companies (and many smaller
companies) are treated as C corporations for Federal
income tax purposes. A Corporation must file under
Subchapter C if it fails to meet even one requirement
to qualify as an S Corporation. C corporation may
have unlimited number of owners.
STEPS FOR FORMING A C
CORPORATION
A prospective creator of a C corporation must
1. Choose an available business name that complies
with their state’s corporations rules;
2. Appoint the initial directors of their corporation;
3. File formal paperwork, usually called “articles of
incorporation,” and pay a filling fee that ranges from
$100 to $800, depending on the state where they
incorporate;
STEPS FOR FORMING A C
CORPORATION (Cont.)
4. Create corporate “by laws”, which lay out the
operating rules for their corporation;
5. Hold the first meeting of the board of directors;
6. Issue stock certificates to the initial owners
(shareholders) of the corporation; and
7. Obtain licenses and permits that may be required for
their business.
LIMITED LIABILITY COMPANY (LLC)
A Limited Liability Company or a company with limited
liability (abbreviated L.L.C. LLC or W.L.L) is a flexible
form of business enterprise that blends elements of
partnership and corporate structures. It is a legal form of
business company, in the law of the vast majority of United
States jurisdictions, that provides limited liability to its
owners. Often incorrectly called a “Limited Liability
Corporation” (instead of Company), it is a hybrid business
entity having certain characteristics of both a corporation
and a partnership or sole proprietorship (depending on
how many owners there are). An LLC, although a business
entity, is a type of unincorporated association and is not a
corporation.
LIMITED LIABILITY COMPANY (LLC) (cont.)
The primary characteristic an LLC shares with a corporation
is limited liability, and the primary characteristic it shares
with a partnership is the availability of pass-through
income taxation. It is often more flexible than a
corporation and it is well-suited for companies with a
single owner.
It is important to understand that limited liability does not
imply owners are always fully protected from personal
liabilities. Courts can and do pierce the corporate veil of
LLCs when some type of fraud or misrepresentation is
involved, or under certain situations where the owner uses
the company as an “alter ego.”
LIMITED LIABILITY LIMITED
PARTNERSHIP
The Limited Liability Limited Partnership
(LLLP) is a relatively new modification of the
limited partnership, a form of business entity
recognized under U.S. commercial law. An
LLLP is a limited partnership and as such
consists of one or more general partners and
one or more limited partners. The general
partners manage the LLLP, while typically the
limited partners only have a financial interest.
Delaware Corporation – Corporate haven
Nevada Corporation – Corporate haven
A Massachusetts business trust or MBT is a legal
trust set up for the purposes of business, but not
necessarily in the state of Massachusetts. They
may also be referred to as an unincorporated
business organization or UBO.
Many businesses are formed as MBTs to mitigate
taxation; mutual funds are often structured as
MBTs.
FACTORS DETERMINING
BUSINESS FORMS
The size and scope of the business, and its
anticipated
management
and
ownership.
Generally a smaller business is more flexible, while
larger businesses, or those with wider ownership or
more formal structures, will usually tend to be
organized as partnerships or (more commonly)
corporations. In addition a business that wishes to
raise money on a stock market or to be owned by a
wide range of people will often be required to
adopt a specific legal form to do so.
FACTORS DETERMINING
BUSINESS FORMS (Cont.)
 The sector and country. Private profit making
businesses are different from government owned
bodies. In some countries, certain businesses are
legally obliged to be organized in certain ways.
 Limited liability. Corporations, limited liability
partnerships, and other specific types of business
organizations protect their owners or shareholders
from business failure by doing business under a
separate legal entity with certain legal protections. In
contrast, unincorporated businesses or persons
working on their own are usually not so protected.
FACTORS DETERMINING
BUSINESS FORMS (Cont.)
Tax Advantages. Different structures are
treated differently in tax law, and may have
advantages for this reason.
Disclosure and Compliance Requirements.
Different business structures may be required
to make more or less information public (or
reported to relevant authorities), and may be
bound to comply with different rules and
regulations.
LEGAL ENVIRONMENT OF BUSINESS
FORMS
1.
Many businesses are operated through a separate
entity such as a corporation or a partnership (either
formed with or without limited liability). Most legal
jurisdictions allow people to organize such an entity
by filing certain charter documents with the relevant
Secretary of State or equivalent (In Ghana Registrar
General) and complying with certain other ongoing
obligations. The relationships and legal rights of
shareholders, limited partners, or members are
governed partly by the charter documents and partly
by the law of the jurisdiction where the entity is
organized.
LEGAL ENVIRONMENT OF BUSINESS
FORMS (Cont.)
Generally speaking, shareholders in a corporation,
limited partners in a limited partnership, and
members in a limited liability company are shielded
from personal liability for the debts and obligations of
the entity, which is legally treated as a separate
“person”. This means that unless there is misconduct,
the owner’s own possessions are strongly protected in
law, if the business does not succeed.
LEGAL ENVIRONMENT OF BUSINESS
FORMS (Cont.)
2. Where two or more individuals own a business
together but have failed to organize a more
specialized form of vehicle, they will be treated as a
general partnership. The terms of a partnership are
partly governed by a partnership agreement if one is
created, and partly by the law of the jurisdiction
where the partnership is located. No paperwork or
filing is necessary to create a partnership, and
without an agreement, the relationships and legal
rights of the partners will be entirely governed by the
law of the jurisdiction where the partnership is
located.
LEGAL ENVIRONMENT OF BUSINESS
FORMS (Cont.)
General partners in a partnership (other than a limited
liability partnership), plus anyone who personally owns
and operates a business without creating a separate legal
entity, are personally liable for the debts and obligations
of the business.
4. Generally, corporations are required to pay tax just like
“real” people. In some tax systems, this can give rise to socalled double taxation, because first the corporation pays
tax on the profit, and then when the corporation
distributes its profits to its owners, individuals have to
include dividends in their income when they complete
their personal tax returns, at which point a second layer
of income tax is imposed.
3.
LEGAL ENVIRONMENT OF BUSINESS
FORMS (Cont.)
In most countries, there are laws which treat small
corporations differently than large ones. They may be
exempt from certain legal filing requirements or labor
laws, have simplified procedures in specialized areas, and
have simplified, advantageous, or slightly different tax
treatment.
6. To “go public” (sometimes called IPO) – which basically
means to allow a part of the business to be owned by a
wider range of investors or the public in general – you
must organize a separate entity, which is usually required
to comply with a tighter set of laws and procedures.
5.
LEGAL ENVIRONMENT OF BUSINESS
FORMS
7. Some businesses are subject to ongoing special
regulation. These industries include, for example,
public utilities, investment securities, banking,
insurance, broadcasting, aviation and health care
providers. Environmental regulations are also very
complex and can impact many kinds of businesses in
unexpected ways.
8. Most Commercial Transactions are governed by
commercial laws of various jurisdictions.
LEGAL ENVIRONMENT OF BUSINESS
FORMS (Cont.)
9. There are also specialized laws on labor relations,
occupational safety, anti-discrimination, minimum wage,
unions, workers compensation and annual vacation or
working hours time.
10. A company is born (formed) by the creation of its
 Articles of Association
 Memorandum of Association
Followed by appointment of its
 Members (e.g. Shareholders, guarantors)
 Directors
And most importantly: A company becomes a legal person
when these records are stamped (authorized) by the local
jurisdiction’s sovereign and (government authority
enabled to authorize such an act).
LEGAL ENVIRONMENT OF BUSINESS
FORMS (Cont.)
11. A legal (artificial , juridical) person can do the same
as a Natural Person. A person (natural), in the eyes of
the law, can do the following:
 Contract and create obligation
 Own Property
 Sue and be sued
 Be obliged to obey law
 Open and hold a bank account
12.Worldwide Company registration:www.commercialregister.sg.ch/home/worldwide.html
LEGAL DOCTRINES
The business judgment rule is an American case lawderived concept in corporations law whereby the “directors
of a corporation…are clothed with [the] presumption,
which the law accords to them, of being [motivated] in
their conduct by a bona fide regard for the interests of the
corporation whose affairs the stockholders have committed
to their charge” and whereby a court will refuse to review
the actions of a corporation’s board of directors in
managing the corporation unless there is some allegation
of conduct that the directors violated their duty of care to
manage the corporation to the best of their ability. The
burden is on the party challenging the decision to establish
facts rebutting the presumption.
INTERNAL AFFAIRS DOCTRINE
The internal affairs doctrine is a choice of law
rule in corporations law. Simply stated, it
provides that the “internal affairs” of a
corporation
(e.g.
conflicts
between
shareholders and management figures such as
the board of directors and corporate officers)
will be governed by the corporate statues and
case law of the state in which the corporation is
incorporated, sometimes referred to as the lex
incorporationis.
DE FACTO CORPORATION
In order for a de facto corporation to be created, the
following elements must exist:
1. There must be an incorporation statute that lays out
the various requirements under which legal
incorporation can be accomplished;
2. There must have been a good faith attempt to comply
with the statute by the intended incorporators;
For example, if the articles of incorporation were mailed
to the appropriate office, but addressed to the wrong
person, lost in the mail, or not filed by the
corporation by the time the corporation began acting
in an official capacity.
DE FACTO CORPORATION
3. There must have been act made on the
corporation’s behalf by its purported officers or
agents.
If all of these requirements are met, then the
business will be treated as a corporation for all
purposes, except with respect to acts by state
itself. However, most states will not apply this
doctrine to protect a person who was aware that
the incorporation effort was defective at the time
that they purported to act on behalf of the
corporation.
CORPORATION BY ESTOPPEL
Corporation by estoppel, on the other hand, applies
against someone who operates a business as if it were a
corporation, irrespective of whether there was a good
faith effort by the business to incorporate.
The person doing business as such an entity may later be
estopped from arguing that it is not in fact a
corporation, in an attempt to reach the assets of the
incorporators. For the same reason, defendants who
had acted as a corporation will be estopped from
denying liability as a corporation when sued by a
plaintiff who had relied on the defendant’s corporate
form when dealing with the defendant.
DIFFERENCES BETWEEN DE FACTO
CORPORATION AND CORPORATION BY
ESTOPPEL
Unlike a de facto corporation, the theory of corporation by
estoppel only applies to contract claimants, not tort
claimants, because claimant should have known the nature
of the entity with which they were doing business.
De facto corporation and corporation by estoppel are
both terms that are used by courts in most common law
jurisdictions to describe circumstances in which a business
organization that has failed to become a de jure
corporation (a corporation by law) will nonetheless be
treated as a corporation, thereby shielding shareholders
from liability.
PIERCING THE CORPORATE VEIL
Piercing the corporate veil describes a legal decision to treat the
rights or duties of a corporation as the rights or liabilities of its
shareholders or directors. Usually a corporation is treated as a
separate legal person, which is solely responsible for the debts it
incurs and the sole beneficiary of the credit it is owned.
Common law countries usually uphold this principle of separate
personhood, but in exceptional situations may “pierce” or “lift”
the corporate veil. A simple example would be where a
businessman has left his job as a director and has signed a
contract to not compete with the company he has just left for a
period of time. If he set up a company which competed with his
former company, technically it would be the company and not
the person competing. But it is likely a court would say that the
new company was just a “sham”, a “fraud” or some other phrase,
and would still allow the old company to sue the man for breach
of contract. A court would look beyond the “legal fiction” to the
reality of the situation.
PIERCING THE CORPORATE VEIL
Piercing the corporate veil is not the only means by
which a director or officer of a corporation can be held
liable for the actions of the corporation. Liability can
be established through conventional theories of
contract, agency or tort law. For example, in situations
where a director or officer acting on behalf of a
corporation personally commits a tort, he and the
corporation are jointly liable and it is unnecessary to
discuss the issue of piercing the corporate veil. The
doctrine is often used in cases where liability is found,
but the corporation is insolvent.