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Legal Structures

Objectives
• At the end of class, you should be able to:
• Distinguish between different forms of business
• Understand factors influencing the form of business

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Legal Business Structure

• The three basic legal forms are:
• Proprietorship,
• Partnership, and
• Company

Differentiating between the three forms of business

Factors Sole Proprietorship Partnership Company
Ownership Individual No limitation on number of partners No limitation on number of
stockholders

Liability of owners Individual liable for business In general, partnership, individuals all Amount of capital contribution is
liabilities liable for business liabilities. In limited limit of shareholder liability
partnership, partners are liable for amount
of capital contribution

Costs of starting None other than filing fees for Partnership agreement, legal costs, and Created only by statute. Articles of
business trade name minor filing fees for trade name. Limited incorporation, filing fees, taxes,
partnership requires more comprehensive and fees for registration to do
agreement, hence higher costs business

Continuity of business Death dissolves the business Death or withdrawal of one partner Greatest form of continuity. Death
terminates partnership unless partnership or withdrawal of owner(s) will not
agreement stipulates otherwise. In limited affect legal existence of business.
partnership, death or withdrawal of one of
limited partners has no effect on continuity.

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Transferability of interest Complete freedom to sell or General partner can transfer his/her Most flexible. Stockholders can sell or
transfer any part of business. interest only with consent of all other busy stock at will. Some stock transfers
general partners. Limited partner can may be restricted by agreement.
sell interest without consent of general
partners.

Capital requirements Capital raised only by loan Loans or new contributions by partners New capital raised by sale of stock or
or increased contribution by require a change in partnership bonds or by borrowing (debt) in name of
proprietor. agreement. corporation.

Management control Proprietor makes all All partners have equal control and Majority stockholder(s) have most
decisions and can act majority rules. In limited partnership, control from legal point of view. Day-to-
immediately. only the general partners have control day control in hands of management who
of the business. may or may not be major stockholders.

Distribution of profits and Proprietor responsible and Depends on partnership agreement and Shareholders can share in profits by
losses receives all profits and investment by partners. receipt of dividends.
losses.

Attractiveness for raising Depends on capability of Depends on capability of partners and With limited liability of owners, more
capital proprietor and success of success of business attractive as an investment opportunity
business
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Choosing a Legal Form of Business Ownership

• Four things an entrepreneur should consider:

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Reflections

• What does it cost to register your chosen form of business?

• Do you need to engage a lawyer?
• How long does the process take?
• Based on the four factors to consider, if you were to register a business today, which legal
form would you register?