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.

Outlines

00:00

🔑 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.

05:03

🤝 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.

10:07

🏢 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.

Keywords

💡Sole Proprietorship

Sole proprietorship refers to a type of business owned and run by one individual who is personally responsible for all aspects of the business. It is the simplest form of business organization. In the video, it is mentioned as having no legal status separate from the owner, meaning the owner and the business are one entity. This form has advantages such as ease of formation and low organizational costs, but also carries the disadvantage of unlimited liability, as seen when the script discusses the owner's personal financial risk in case of business debts.

💡Partnership

A partnership is a business organization consisting of two or more individuals who share ownership and actively participate in the management of the business. The script outlines that partnerships have no legal status separate from the partners, implying shared responsibility for business outcomes. The video also distinguishes between general partnerships, limited partnerships, and limited liability companies (LLCs), each with different levels of liability and management structures. Partnerships offer the advantage of pooled resources but come with the disadvantage of unlimited liability for all partners.

💡Corporation

A corporation is a separate legal entity from its owners, allowing for limited liability and the ability to issue shares. The video script explains that corporations can be either public or private, with public corporations having shares traded on stock exchanges and private corporations having shares sold to select investors. The advantage of a corporation includes limited liability for shareholders, as their financial risk is limited to the amount they invested in shares, contrasting with the unlimited liability of sole proprietorships and partnerships.

💡Unlimited Liability

Unlimited liability is a condition where business owners are personally responsible for all business debts, meaning their personal assets are at risk if the business cannot pay its debts. The script uses this term in the context of sole proprietorships and partnerships, where the owner or partners could potentially lose their personal wealth if the business fails financially. This is in contrast to corporations, where liability is typically limited to the amount invested.

💡Legal Status

Legal status in the context of the video refers to the recognition of a business entity as a separate legal entity from its owners. Sole proprietorships and partnerships do not have separate legal status, meaning the business and its owners are considered one and the same for legal purposes. In contrast, corporations have a separate legal status, which means the company can enter into contracts, own property, and be sued or sue in its own name, as mentioned in the script.

💡Perpetual Succession

Perpetual succession is the concept that a corporation continues to exist indefinitely, regardless of changes in its ownership or management. The video script explains that corporations have perpetual succession, meaning they can operate until they are legally dissolved, unlike sole proprietorships and partnerships which may end upon the death or withdrawal of the owner or partners.

💡Board of Directors (BOD)

The Board of Directors is a group of individuals elected by the shareholders of a corporation to oversee the management of the company. In the script, it is mentioned that corporations are managed by a BOD, which may or may not include the shareholders themselves. This structure allows for professional management and a separation of ownership and control within the corporation.

💡Capital Raising

Capital raising refers to the process by which businesses obtain funds needed for operations, expansion, or other purposes. The script highlights that corporations can raise capital more easily than sole proprietorships or partnerships, as they can issue shares to the public, attracting a larger pool of investors and funds.

💡Regulations

Regulations in the context of the video are the rules and legal requirements that businesses must follow. Corporations, as the script explains, are subject to more regulations and must disclose financial statements to the public, unlike sole proprietorships which may have minimal regulations and more secrecy.

💡Transferability

Transferability refers to the ease with which ownership of a business can be transferred from one party to another. The script discusses the ease of ownership transferability in corporations, where shares can be bought and sold, allowing for a simple change of ownership. This contrasts with partnerships, where transferring ownership may require ending the business.

💡Professional Management

Professional management involves hiring experienced individuals to run the business operations on behalf of the owners. The video script points out that corporations have the resources to employ professional managers, which can lead to more efficient and effective business operations, as opposed to sole proprietorships where the owner must handle all aspects of the business.

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!