Legal Forms of Business Organization【Dr. Deric】
Summary
TLDRThis video script by Deric introduces three main business organization forms: sole proprietorship, partnership, and corporation. It outlines the characteristics, advantages, and disadvantages of each, including legal status, liability, management, and ownership transferability. Sole proprietorships are easy to form with low costs but carry unlimited liability. Partnerships offer shared management but also unlimited liability for partners. Corporations provide limited liability and easy capital raising, but at the cost of higher complexity and regulations.
Takeaways
- 😀 Sole Proprietorship: A one-person business with no legal separation between the owner and the business, resulting in unlimited liability.
- 👥 Partnership: A business form involving two to twenty people sharing unlimited liability and management responsibilities.
- 🏢 Corporation: A separate legal entity that can sell shares, offering limited liability to shareholders and a perpetual succession of business.
- 💰 Unlimited Liability: In both sole proprietorship and partnership, owners are personally liable for business debts.
- 🏦 Limited Liability: Corporations protect shareholders from personal financial loss due to the company's debts.
- 📈 Raising Capital: Sole proprietorships have limited fundraising options, while corporations can raise funds from the public.
- 🔑 Control: Sole proprietors have complete control, whereas corporations are managed by a Board of Directors.
- 💼 Professional Management: Corporations can afford to hire professional managers, unlike sole proprietorships or partnerships.
- 📚 Regulations and Disclosure: Corporations face more regulations and must disclose financial information, unlike sole proprietorships and partnerships.
- 🛑 Business Termination: Sole proprietorships and partnerships can end with the owner's death or decision, while corporations require legal winding-up.
- 🔄 Ease of Transferability: Shareholders in a corporation can easily transfer ownership by selling shares, unlike in other business forms.
Q & A
What are the three common forms of business organization mentioned in the video?
-The three common forms of business organization are sole proprietorship, partnership, and corporation.
What is the legal status of a sole proprietorship?
-A sole proprietorship has no separate legal status, meaning the owner and the business are not separated.
What are the implications of unlimited liability for a sole proprietor?
-Unlimited liability means that if the business cannot pay back a debt, the owner will have to use their own money to cover the debt, and may become bankrupt if the business does.
What are the advantages of a sole proprietorship?
-Advantages include ease of formation and dissolution, low organizational cost, minimal regulations, secrecy, complete control, and entitlement to all profits.
What is the maximum number of owners allowed in a partnership?
-A partnership allows a minimum of 2 and a maximum of 20 owners.
What are the three types of partnerships described in the video?
-The three types of partnerships are general partnership, limited partnership, and limited liability company (LLC).
How does a limited liability company (LLC) differ from a general partnership?
-An LLC is a hybrid structure that combines elements of a corporation and a partnership, offering limited liability to its owners while being taxed like a partnership.
What is the legal status of a corporation?
-A corporation has a separate legal entity status, meaning the company and its owners are separate, and creditors can only sue the company, not the owners.
What are the advantages of a corporation in terms of liability and capital raising?
-Corporations offer limited liability to shareholders, protecting their personal assets, and make it easier to raise capital from the public.
What are the disadvantages of forming a corporation?
-Disadvantages include the complexity of formation, high organizational costs, compliance with more regulations, and the requirement to disclose financial statements to the public.
What is perpetual succession in the context of a corporation?
-Perpetual succession means that a corporation can continue to do business indefinitely, regardless of changes in ownership or the death of its founders.
Outlines
🔑 Sole Proprietorship Explained
This paragraph introduces the concept of sole proprietorship, which is a business owned by a single individual with no legal distinction between the owner and the business entity. The owner bears unlimited liability, meaning personal assets are at risk if the business cannot repay its debts. The advantages of this form include ease of formation and dissolution, low organizational costs, minimal regulations, and complete control over the business. Disadvantages include personal liability for business debts, limited fundraising capabilities, the necessity for the owner to be skilled in all aspects of the business, and the automatic termination of the business upon the owner's death.
🤝 Partnership Business Structures
The second paragraph delves into partnerships, which are businesses owned by two to twenty individuals. Like sole proprietorships, partnerships do not have a separate legal status, and partners share unlimited liability. The paragraph outlines three types of partnerships: general partnerships with equal liability, limited partnerships with varying degrees of liability, and limited liability companies (LLCs) that offer limited liability to owners. Advantages include ease of formation, increased funding potential, and limited liability for certain partners in specific structures. Disadvantages are the shared liability among partners, potential legal implications from the actions of other partners, and challenges in transferring partnership interests. The business may also terminate under various circumstances such as a partner's death or insanity.
🏢 Corporations: Legal Entity and Ownership
The final paragraph discusses corporations, which are separate legal entities with distinct advantages such as limited liability for shareholders, the ability to raise capital through public offerings, and perpetual succession regardless of ownership changes. Corporations can be either public, with shares traded on stock exchanges, or private, with shares not available to the general public. The paragraph contrasts the professional management and potential for seamless ownership transfer with the complexities and costs associated with forming and operating a corporation. It also highlights the stringent regulations and the requirement for corporations to disclose financial information publicly, which can affect the protection of trade secrets.
Mindmap
Keywords
💡Sole Proprietorship
💡Partnership
💡Corporation
💡Unlimited Liability
💡Legal Status
💡Perpetual Succession
💡Board of Directors (BOD)
💡Capital Raising
💡Regulations
💡Transferability
💡Professional Management
Highlights
Introduction to the three common legal forms of business organization: sole proprietorship, partnership, and corporation.
Sole proprietorship is a one-person business with no legal separation between the owner and the business.
Unlimited liabilities in sole proprietorship mean the owner is financially responsible for business debts.
Sole proprietorship allows for complete control and ownership of business assets by the single owner.
The business ends with the death of the owner or their decision to terminate it in a sole proprietorship.
Advantages of sole proprietorship include ease of formation, low cost, minimal regulations, and complete control.
Disadvantages include unlimited liability, limited funding options, and the need for the owner to be a jack-of-all-trades.
Partnership is similar to sole proprietorship but involves multiple owners sharing the business.
Partnerships have a maximum of 20 partners and also feature unlimited liabilities.
Three types of partnerships: general partnership, limited partnership, and limited liability company (LLC).
Advantages of partnership include ease of formation, ability to raise funds, and limited liability for some partners.
Disadvantages include shared unlimited liability, joint responsibility for partners' actions, and difficulty in transferring partnership interests.
Corporations have a separate legal entity status, protecting owners from personal liability for company debts.
Corporations can have a varying number of owners, from a minimum of 2 to an unlimited number in the case of public corporations.
Corporations are managed by a Board of Directors, which may not include all shareholders.
Corporations offer perpetual succession and ease of ownership transfer through share sales.
Advantages of corporations include limited liability, ease of raising capital, business continuity, and professional management.
Disadvantages include complex formation, high organizational costs, strict regulations, and lack of secrecy.
Transcripts
Hey guys, I’m Deric, welcome to my channel. In this video,
I’m gonna explain to you, the legal forms of business organization.
There are three common forms of business organization, including, sole proprietorship,
that is one-person business. Partnership, a group of people, like friends and family,
doing business together. Corporation, basically a big company that is allowed to sell shares.
Under sole proprietorship, it has no legal status, which means the owner
and the business are not separated. Owner is the business, business is the owner.
Anything good or bad happens to the business will affect the owner.
Maximum owner allowed for sole proprietorship is only one person.
It cannot have more than one owner.
Sole proprietorship has unlimited liabilities, which means if the business is not able to
pay back a debt, the owner will have to use his own money to pay for the debt.
If the business is bankrupt, the owner may become bankrupt as well.
Next, all the properties and assets of company are owned by the sole proprietor.
And the business is managed by the sole proprietor himself or herself.
Termination of the business occurs when the owner dies,
or when the owner chooses to terminate the business.
For sole proprietorship, there are some advantages and disadvantages.
The advantages include,
it’s easy to form and dissolve, dissolve means to close.
Low organizational cost. You just have to pay less than $100 to register for the company’s name.
Then you can start your business. The cost of maintaining the business is also usually lower.
Minimal regulations and more secrecy. Not many rules or laws you have to comply with,
and you don’t have to disclose your company’s information to the public.
So you can keep your own secret recipe.
Maintain complete and ultimate control. As you are the only owner of the business,
you can have complete and ultimate control for the development of the business.
The proprietor is entitled to all the profits.
You don’t have to share the profits with other people, as you are the only owner of the business.
For the disadvantages,
First, unlimited liabilities. This means that you will have to pay for all the debts of the company.
If you are not able to repay the debts,
the company will be bankrupt, and you may go bankrupt as well.
Limited fund raising. It happens because
you don’t have other partners who can contribute money to run the business.
Banks might not consider lending money to you if you don’t have a good credit record in the past.
Proprietor must be jack-of-all trades.
It means you must know everything and be able to do everything for the business.
As you are alone, you have to do marketing, logistics, accounting and finance on your own.
The firm is terminated when the proprietor dies.
Unfortunately, the business will not continue if the owner passes away.
Next, partnership.
Partnership has no legal status, similar to sole proprietorship, in which the partners
and the business are not separated. Partners are the business, business is the partners.
Anything good or bad happens to the business will affect the partners.
Number of owners allowed for partnership is minimum 2, maximum 20 partners.
Partnership has unlimited liabilities, just like sole proprietorship, which means if the
business is not able to pay back a debt, all the partners will have to use their own money to pay
for the debt. If the business is bankrupt, the partners may become bankrupt as well.
All the properties and assets of company are jointly owned by the partners.
Every partner is entitled to participate in the management of the business.
Termination of the business occurs when any one of the partners dies,
becomes bankrupt, withdraws, or becomes insane. Insane means mental problems.
There are three types of partnership.
The first type is called general partnership. All partners have unlimited liability,
that means all partners will have to bear equal responsibility to pay back the debt.
The second type is limited partnership. It consists of one or more general partners who
have unlimited liability. Then it will have one or more limited partners or investors,
whose liability is limited to the amount of money they invest in the business.
The third type is limited liability company, LLC. It is a hybrid business structure,
operating similar to a corporation and a partnership. It is like a corporation because
the owners of LLC have limited liability, but the firm runs and is taxed like a partnership.
For partnership, there are some advantages and disadvantages.
About the advantages,
Compared to corporation, it’s relatively easy to form and dissolve a partnership,
dissolve means to close.
Partnership can raise more funds than the sole proprietorship.
As now you have more partners, they all can contribute money to the business.
The limited partnership permits some of the partners the privilege of limited liability.
Under limited partnership, if the business failed and incurred debt or legal problems, the general
partners would be personally liable for all the losses incurred. However, for limited partners,
their liability would be limited to the amount of their investment in the business. This means
that the personal assets of limited partners would not be at risk if the business failed.
About the disadvantages,
Unlimited liabilities. Similar to sole proprietorship, partners will have to
pay for all the debts of the company. If partners are not able to repay the debts,
the company will be bankrupt, and partners may become bankrupt as well.
Each partner is liable for the actions of other partners.
If one of the partners represented the company to do business with the customer, but later on this
partner cheated the customer’s money. According to partnership law, if the customer sued the
partnership company, all the partners would be in trouble. Even though that is not your fault,
you will still have the bear the responsibility because of other partners’ wrongdoings.
Another difficulty is about partnership transferability.
If you are not happy with other partners, you cannot simply transfer
your partnership to another person. The only way is to end the business.
About the termination of partnership, let say your business has three partners,
if one of the partners dies, becomes bankrupt, withdraws,
or becomes insane, the partnership is considered being terminated.
Next, let’s talk about corporation.
About the legal status, corporation has separate legal entity, which means the company and the
owners are separated. If the company is in debt, the creditors can only sue the company,
but not the owners. Shareholders are the owners of the corporation.
For the number of owners allowed for corporation,
private corporation is allowed to have minimum 2, and maximum 50 owners, while
public corporation is allowed to have minimum 2, and no limit on maximum number of owners.
Owners of corporation have limited liabilities. So, if the corporation is bankrupt, it will not
affect the owners or shareholders. The maximum loss for shareholders will only be the amount
of money that they paid to buy the shares. They don’t have to pay for the company’s debts with
their own money. This is very different from sole proprietorship and partnership.
All the properties and assets of company are owned by the company, not by the shareholders.
Because company is a separate legal entity, company is treated as a person, that’s why
the company can own assets, it can sue or be sued under law, and it can borrow money from the banks.
That’s what we mean, separate legal entity.
Corporation is managed by the Board of Directors, BOD. Directors may or may not be the shareholders
of the company. Usually, most of the shareholders are not the management of the company.
For the termination of the corporation, it would only happen by undergoing legal winding-up.
Corporation is assumed to have perpetual succession, which means
it can do business until forever. However, if the company is not able to pay back the debt,
the company will be liquidated, and eventually becomes bankrupt.
By that time the corporation is terminated, but it has to go through a legal process.
There are two types of corporation.
First, public listed company, PLC. Shares are openly sold to the public, and shares
are traded on the stock exchange. It’s also known as Incorporation, or Berhad in Malaysia.
Second, private limited company, Ltd. Shares are only sold to a selected group of investors,
not to the public, and their shares are not traded on stock exchange.
It is also called Sendirian Berhad in Malaysia.
For both public listed and private limited companies,
shareholders may not lose their personal assets if the company is insolvent.
For corporation, there are some advantages and disadvantages.
About the advantages,
Compared to sole proprietorship and partnership, owners of corporation have limited liabilities.
Shareholders don’t have to pay for the debts of the company by using their own money.
It’s easy to raise capital under corporation,
because corporations can raise capital from the public.
Continuity of the business, regardless of an owner’s withdrawal or death.
Even the founder passed away, the business would still continue to run.
Ease of ownership transferability.
If you buy the shares of the company, you become the owner of the company. One day, if you are not
happy with the performance of the company, you may just simply sell the shares and walk away.
You don’t have to go through any legal process for transferring the ownership.
Managed by the professional. Corporations would have sufficient
fund to hire professional people to run the business on the behalf of the shareholders.
About the disadvantages,
It’s complicated to form a corporation. You may need professional assistant to help you on this.
You may have to meet certain criteria before you can start a corporation,
and the waiting time for approval is longer.
High organizational cost. For examples, you will have to pay the professional people
to work for you, and you also have to pay the auditors for checking your company’s accounts.
More regulations to comply with and lack of secrecy. Corporations will have to comply
with many rules and regulations, as well as the laws of the country.
Corporations are also required to disclose the financial statements of the company to the public.
That’s why it could be hard for the company to keep their trade secret.
Alright, that’s all for this video, thanks for watching, see you in the next one, bye!
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