Sole Proprietorship

What is the Differences among the Various Legal Structures in a Business?

calendar31 May, 2023
timeReading Time: 11 Minutes
What is the Differences among the Various Legal Structures in a Business?

The legal structure of a corporation, which is often referred to as its “entity,” is a classification that is recognised by the government and has an impact on how business is conducted. Your company’s legal structure is one of the factors that determine the federal tax rate at which it is subject. There is a possibility that there may be legal repercussions at the state level.

Significance of a Company’s Legal Structure

When starting a new firm, one of the most important choices you will have to make is which legal structure in a business would best suit your needs. The following are some factors to take into account:

  • Individuals who run their businesses as sole proprietorships, partnerships, or S corporations are required to report the profits of their companies as personal income on their tax returns. The revenue of a C company is entirely separate from the individual income of its owners. Because of the differential in the tax rates that are applied to personal income and business revenue, the structure that you choose might have a significant influence on the amount of tax that you owe.
  • Consider establishing a limited liability company, often known as an LLC, to shield your own assets from any potential legal claims. On the other hand, limited liability company formations are only permitted at the state level and are not recognised by the central government. As a kind of federally registered business entity, C corporations have the same level of limited liability protection as limited liability companies (LLCs).
  • Documentation: There are several tax forms for each possible organisational structure of a company’s legal affairs. In order to form a company for a commercial enterprise, the business owner must first file with the government certain documents, including articles of incorporation. In addition, you are need to file extra papers if you decide to form a partnership and conduct business under a name that is different from your own.
  • A board of directors is a necessary component of corporate entities and must be appointed. This board is mandated in certain jurisdictions to convene meetings at predetermined intervals, such as once every two years. The passing away of a progenitor or shareholder does not have to result in the dissolution of the organisation since corporate arrangements prevent this from happening. The majority of the other buildings do not have this form of security closing.
  • A state requires a corporation to have a corporate legal structure in place before the company may be registered in that state. In the absence of a formal company, you will not be able to register for tax IDs, licences, or permits of any kind.
  • It’s possible that your organization’s legal structure will prevent you from reaching your fundraising goals. For example, the issuance of shares by a single proprietorship is a rather rare occurrence. Businesses are the only ones allowed to enjoy this perk.
  • It is possible to make adjustments to the structure of your company in the future; nevertheless, it is very important to get it right the first time in order to prevent unforeseen effects. Changing the form of your company is not always a straightforward procedure since doing so may have unfavourable repercussions for your taxes and result in the unintended termination of your firm.

Legal Structures of Organisational Management in Businesses

The firm has implemented an ownership structure that is recognised by the law. The primary impetus for the formation of these businesses is the aspiration to amass enormous riches. A company may be managed by private persons, government organisations, or even public-sector labour unions. All of these options are viable. In a business structure known as a sole proprietorship, the owner also serves as the only paid employee of the company.

Co-operatives, joint stock companies, and partnerships are all examples of company forms in which ownership and management responsibilities are split between two or more persons.

The Following Types of legal structure in a business:

1. To Be A “Sole Proprietor”

A “sole proprietorship” is defined as a business that consists of just one person and is not a limited liability company in this state. It is the least complicated kind of company ownership, and you don’t need any previous expertise or planning to start one. The company that engages in activities such as consulting, sales on a commission basis, acting as an independent contractor or contract worker, etc. These businesspeople operate as what are known as “sole proprietors.”

One definition of a sole proprietorship offered by the Oxford English Dictionary describes it as “the form of business organisation in which a single individual is responsible, who directs its operations, and who bears the risk of failure alone.” “The individual proprietors’ hip.”

When a person goes into business for him or herself, he or she is referred to be a “sole proprietor.” This means that the individual is the only owner of the firm, serves as its single manager, and is the sole recipient of any monetary profits or losses.

Characteristics Of A Sole Proprietorship Include:

  • Sole Possession Of The Business – In this scenario, there is only ever going to be one person involved as the owner of the business. The essential cash for the firm comes from the contributions of friends, family members, and other investors.
  • Due to the absence of a Separate Legal Entity – In the eyes of the law, the business and its owner are considered to be one and the same entity when it comes to a sole proprietorship. However, if the person who owns the firm passes away or files for bankruptcy, the company will no longer be in operation.
  • At Long Last, Liability – The owner is exclusively accountable for payment of any and all debts. In the event that a company’s debts are more than its assets, the company’s owner may be required to utilise his personal assets to settle the debt.
  • Abolishing the Practise of Profit Sharing– The lone owner is responsible for each and every profit and loss. He does not have any business partners with whom he may share both earnings and losses. He is the only one to blame for the monetary problems the firm is experiencing.
  • A lack of legal procedures– The foundation of a sole proprietorship as well as its on-going operations do not need any kind of authorisation from the government. However, in order to run the company, you will need to get a licence first. This is the only other need.

2. Partnership Firm

A partnership is a legal agreement that exists between at least two people who agree to share the profits of a company that either both of them own jointly or that one person runs on their behalf. In a broader sense, it is a term that describes the collaboration of separate persons in the ownership or administration of a single enterprise. To form a partnership, there must be a minimum of two people involved, while the maximum number of partners allowed is ten in the financial sector and twenty in all other types of organisations. In order to be successful in the business world, “a partnership or firm, as it is commonly known, is a group of men who have pooled their capital or services.”

Partners are defined as any two or more adults who have the competence to legally bind themselves to an agreement to manage a company jointly for the purpose of financial benefit

According To the Indian Partnership Act, 1932[1], Section 4, It States:  A relationship between two or more people who have made a pact to split the earnings of a firm that either they jointly manage or one of them controls alone.

Characteristics of a Partnership Business –

  1. For Groups Consisting Of At Least Two People – To launch a partnership company, there must be at least one individual and no more than ten participants (in the financial sector), or twenty participants (in all other businesses). Two persons cannot form a relationship together because it is impossible.
  2. Formal Contractual Agreement – Multiple people will own a portion of a corporation’s assets if the ownership of those assets is structured as a shared ownership arrangement. The fact that these contracts and agreements are handed in under terms that have already been decided upon means that they almost never give rise to legal complications.
  3. Legal Transactions – The federal government acknowledges that partnerships are a legal structure that may be used to run a company and derive profits from that activity. However, partnership law does not apply to companies that are created for the purpose of engaging in criminal activities such as the sale of contraband goods on the black market.
  4. Sharing That Generates Profit– Each partner in a company that operates under a partnership receives a portion of the total profits made by the enterprise on the basis of the conditions outlined in the partnership agreement. In the same way that earnings are split evenly among partners, so too are losses.
  5. Equivalent/ Mutual Representation – One of the criteria that defines a partnership is the presence of mutual agency between the members in the relationship. When working together on a project, it is essential to have a coherent shared vision and the ability to rely on one another.

3. Companies that Use a Joint Stock Company Approach

The corporate structure known as a “joint stock company” is one in which the shareholders retain their legal ownership but the organization’s management is handled by an elected “board of directors” with limited liability. This kind of corporation is called a “joint stock company.” It has been determined that the best business form for the 21st century is a joint stock company. It is the only way that is generally accepted and considered standard for running a firm. A group of people who get together to form their own separate legal body might do so by forming what is known as a joint stock company. A common mark and distinctive nomenclature both serve as guarantees of perpetuity. The corporation itself has limited liability, in addition to having a capital structure that is comprised of shares that are tradable in the marketplace.

A requirement for participation in a joint stock corporation is ownership of the shares issued by the firm. According to one definition, a joint stock corporation is “a voluntary association of individuals for profit with a capital that is divided into transferable shares.”

A corporation is “a mere creature of law, processing only those properties which the charter of its creation expressly or incidentally confers upon it,” as stated by the American Law Institute.

What Makes Joint Stock Companies Different from Other Companies?

  1. A Fictitious Person Who Possesses Their Own Independent Legal Entity – There is no such thing as the physical entity known as a corporation limited by stock shares. A corporation is a kind of legal fiction that has its own individual identity. Purchasing, trading, and holding property are all activities that are sanctioned by the law. If a company has shares, it is permitted under the law to buy and sell real estate in its own name. The firm is at liberty to enter into contracts with companies of a different kind and to carry out a wide range of other economic operations.
  2. Action Taken in Collaboration – The members of this Association took the initiative to establish this organisation from the very beginning. During the process of its establishment, it is not essential to conform to any rules or regulations that are established by the government.
  3. Consisting of Traits That Will Never Change – This Company will continue to exist indefinitely, either until it is either wound up or put up for sale. Both new shareholders and shareholders who have already been a part of the firm may join or leave at any moment, and ownership can be transferred at any time.
  4. This is the Common Trust Symbol– Because the document in question does not already exist, there is no obligation for the corporation to sign it. For this reason, the company uses a seal that bears its name, and the use of this seal is what is indicated by the term “Signature.” This seal is held under the strictest of security conditions. Any time the corporate seal is going to be used on a document, there has to be a minimum of two directors present.
  5. Responsibility Restrictions – The owners or shareholders of a limited liability business are shielded from any personal financial loss that may occur as a result of the firm’s operations. The risk that everyone shareholder takes is confined to the sum of all their investments.

4. Co-operative Societies Working Together

  1. A co-operative organisation is a legal company that is owned and governed by a group of persons who have a similar goal. These individuals work together to achieve their goals. Cooperatives are organisations that have a variety of advantageous characteristics, such as limited liability, indefinite lifespan, a board of directors that is democratically chosen, and administrative workers.
  2. The owner of the firm owes the Cooperative a certain fixed commission, which the Cooperative is authorised to collect. Every member receives a piece of the company’s income that is equal to the amount of money they have invested in the business. There are no restrictions placed on groups that serve a charitable purpose since they are exempt from paying income taxes.
  3. It is not affiliated with any other organisation and is owned and run by the people who make use of its services or goods. Shareholders have no say in the day-to-day operations of the business when it is organised as a cooperative.
  4. The maximisation of profits for a select group of shareholders is not a key focus of a co-operative, in contrast to the structure of a corporation, which has many more stockholders. The Co-operative guarantees that each member has an equal voice in the way the firm is run by adhering to the notion of “one member, one vote” as its guiding principle.
  5. Equality, mutual trust, supervision, independence, and spontaneity are the five pillars that the C-operative organisation is built around. These pillars support the organisation as a whole. The capacity of a group to successfully cooperate with one another is its greatest strength.

According To Information Provided By The International Labour Organisation:

  • In accordance with the Co-operative Principles and Rules, “a Co-operative organisation is an association of persons, typically of limited means, who have voluntarily joined together to achieve a common economic and through the formation of a democratically controlled organisation, making an equitable contribution to the required capital and accepting a fair share of the risks and benefits of the undertaking.”
  • Organisation of wage workers and other modest producers who have banded together on a democratic basis in order to build companies that they would govern jointly for the purpose of improving their economic well-being.

The Following Is A List Of The Provisions That May Be Found In The Indian Co-Operative Society Act Of 1912:

In accordance with the principles of cooperation, the primary purpose of a cooperative society is to further the financial well-being of its individual members.

Characteristics That Can Be Used to Recognise a Cooperative Group –

  1. Action Taken in Collaboration – A collection of persons who have voluntarily joined forces in order to create an organisation is referred to as a co-operative (C O-operative for short). Participation in it is completely up to the individual.
  2. The Process of Forming a Corporation or Other Type of Legal Entity – A legally independent body that has its own identity is what we mean when we talk about cooperative organisations. A common seal and everlasting succession are gained following registration.
  3. Equal Access to the Ballot Box – It makes no difference which member of the cooperative organisation really owns the shares. Each member only has one vote available to cast. Because of these principles, it is impossible for even the person with the most wealth to impose his or her will on the other members of the group.
  4. The Reason for Providing This Service – Member services are the principal area of concentration for cooperatives (COOs). They initially give their services to their members at no cost; nevertheless, they may be able to make a profit by providing their services to those who are not members of their organisation.
  5. The Economic Cataclysm in Its Final Stages– Every cooperative organisation, in addition to focusing on providing service to its members, also has a financial focus. One example of this would be the distribution of consumer products, another would be the providing of land for development, and still another would be the provision of marketing services.

The distribution of enhanced seedlings, the supply of the best fertilisers, the provision of low-cost lending facilities, and other similar activities might be among the economic goals pursued by a co-operative organisation whose primary concentration is on agriculture.

The Benefits Of Adopting A Cooperative Organisational Structure Include:

  1. Easy to Put In to Practise – It is not very difficult to set up an organisation that operates on the cooperative model. A Co-operative organisation may be established by any group of ten people who have a common interest and who are willing to register their organisation with a registrar of cooperative societies.
  2. Free of Charge to Join – A co-operative organisation is open to membership from anybody who shares the mission of the group. They are allowed to join the organisation or quit it at any moment that they see fit.
  3. Controlled Without the Involvement of Humans – It functions on its own, with members exercising their right to elect a representative in order to make decisions. A authorised representative is in charge of supervising the organization’s day-to-day activities as well as its administration.
  4. Responsibility Restrictions – When a cooperative is in place, its members are protected from suffering excessive financial losses. This is beneficial for them since it will only be extended up to the amount of money that they have given in the first place.
  5. Assistance provided by the government-The cooperative organisations get a wide variety of different sorts of aid from this funding. Examples include C capital funds, low-interest loans, tax perks, loan repayment subsidies, etc.

Conclusion

The fact that the most successful firms are structured as corporations demonstrates the usefulness of the corporate form of organisation. Establishing, organising, and administering a corporation is a more complex endeavour overall. The reporting requirements for the stock market are more stringent than those for other marketplaces. You won’t be able to take part in management until you hold a significant enough number of shares in the company for you to be able to exercise some level of influence over it. Despite this, the management of the company is able to alleviate these worries by enlisting the support of a group of professionals consisting of lawyers, accountants, and consultants.

Read Our Article: Business Structures In India: Types And Benefits

Request a Call Back

Are you human? : 1 + 6 =

Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality