Legal Forms of Business Organization【Dr. Deric】

Summary

This 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.