Chapter Five: Corporations 1 Corporation 1. 2. 3. 4. 5. A corporation is “a legal entity which has a separate legal personality from its members.” The main legal rights and obligations of the corporation are: The ability to sue and be sued; The ability to hold assets in its own name; The ability to hire agents; The ability to sign contracts; The ability to make by-laws, which govern its internal affairs. 2 Stewart Kyd, English scholar, defined a corporation as "a collection of many individuals united into one body” Corporation has capacity of acting, in several respects, as an individual. Taking and granting property, Contracting obligations, Suing and being sued, Enjoying privileges and immunities, Exercising a variety of political rights, This is completed according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence. 3 Business corporation: Investors and entrepreneurs often form joint stock companies and then incorporate them to facilitate conducting business; as this business entity now is prevalent, the term corporation often is used to specifically refer to such business corporations. Municipal corporation: Corporations may also be formed for local government; political, religious, and charitable purposes (not-for-profit corporation), Government-owned corporation: for government programmes. 4 1. 2. 3. 4. Modern business corporation is the dominant type of corporation. Characteristics: Legal personality, Transferable shares (shareholders can be changed without affecting its status as a legal entity), Perpetual succession capacity (its possible continued existence despite shareholders' death or withdrawal), Limited liability: (for instance) Shareholders' amnesty from criminal actions of the corporation. Shareholders' limited responsibility for corporate debt. 5 Corporate Law: Corporate law (also corporation law or company law) refers to “the law establishing separate legal entities known as the company or corporation and governs the most prevalent legal models for firms” In the U.K., corporate law is a subset of companies law Corporations are distinguished from a wider spectrum of organisational forms, such as partnerships, unincorporated associations, or sole proprietorships 6 Companies Company: the word company has no strictly legal meaning, but is taken to mean a specific form of entity created under the laws of the relevant jurisdiction. Technically, a company (in the U.S., a corporation) is “a juristic person or legal entity which has a separate legal identity from its shareholding members, and is ordinarily incorporated to undertake commercial business.” Because of the limited liability of the members of the company for the company's debts the separate personality, it has become the most popular form of business in most countries in the world. 7 Companies have a number of other uses: Companies, being commercial entities, are often easier to utilise in financing arrangements than partnerships and individuals. Companies have a flexibility which can let them grow; there is no legal reason why a company initially formed by a sole proprietor cannot eventually grow to be a publicly listed company, but a partnership will generally always be limited as to the maximum number of partners. 8 Companies' Law: Companies' law is “the field of law concerning business and other organisations, including corporations and other associations which usually carry on some form of economic or charitable activity.” The largest companies are usually publicly listed on stock exchanges around the world Private companies choose who their shareholders are. The most prominent kind of company, usually referred to as a “corporation” governed by corporate law. The defining feature of the corporation is that shareholders own the sole rights to vote under the company constitution and to appoint the directors who control the company. 9 Partnerships Partners may limit their liability for company losses. Even single individuals (sole traders) may incorporate themselves and limit their liability in order to carry on a business. All different forms of companies depend on the particular law of the particular country in which they reside. 10 US Companies Law: In the United States, corporations are generally organised under the laws of a particular state. Corporate law governs that corporation's internal authority (even if the corporation's operations take place outside of that state). The corporate laws of the various states differ in some cases significantly corporate lawyers are often consulted in an effort to determine the most appropriate or advantageous state in which to incorporate. 11 Companies' Law Theory: A corporation is described “a person in a political capacity created by the law” to endure in perpetual succession. Americans in the 1790s knew of a variety of corporations becoming more aware of that variety than we are today. Some were distinguished by their interests: promote commerce, education, and religion. At least one early American legal thinker saw that corporations should be erected with caution, and inspected with care. In their external actions or transactions, corporations enjoy the same latitude as private individuals many saw this as principal advantage in incorporation. 12 The power of making by-laws was tacitly annexed to corporations by the act of their establishment. While they must not contradict the legal system of the country. Many questions are asked! One of which is the duties of corporations? The general duties of every corporation may be collected from the nature and design of its institution: it should act agreeably to its nature, and fulfill the purposes for which it was formed. 13 If corporations, its commercial or social conduct, or the by-laws are to be inspected? The law has provided proper persons with proper powers to inspect those institutions. The Common Law provided for inspection by the court of king’s bench. In 1790, at least, the powers of the court of king's bench were vested in the supreme court of Pennsylvania. The dissolution of corporations? a corporation might surrender its legal existence into the hands of that power, from which it was received. the dissolution of the corporation ensues its surrender. 14 Companies Law Study: Law schools offer courses covering different aspects of this area of law. The area of study examines issues such as: 1. How each major form of business entity may be formed, operated, and dissolved; 2. The degree to which limited liability protects investors; 3. the extent to which a business can be held liable for the acts of an agent of the business; 4. The relative advantages and disadvantages of different types of business organisations, 5. The structures established by governments to monitor large corporations. 15 The theory behind business organisations is by combining certain functions within a single entity, a business can operate more efficiently, and thereby realise a greater profit. Governments seek to facilitate investment in profitable operations by creating rules that protect investors in a business from being held personally liable for debts incurred by that business, either through mismanagement, or because of wrongful acts 16 Origins: Etymology: the word "corporation" derives from the Latin Corpus (body), representing a "body of people"; that is, a group of people authorised to act as an individual. The word universitas also used to refer to a group of people but now refers specifically to a group of scholars (University). In England the term corporation was also used for the local government body in charge of a borough. This style was replaced in most cases with the term council in Britain in 1973, and in the Republic of Ireland. The sole exception is the Corporation of London which retains the title. 17 Pre-Modern Corporations: Corporations have been present in some forms as far back as ancient India and ancient Rome. Although devoid of some of the core characteristics by which corporations are known today, They were enterprises with a form of shareholders who invested money for a specific purpose. Such corporations in the Roman Empire were sanctioned by the state, while such corporations in other Empires were mostly private commercial entities. With the collapse of the Roman Empire, the Roman conception of the corporation merged with other views. Germanic tribes maintained that a group entity in and of itself could have a separate identity from that of its members. 18 These influences came together in the body of canon law built around the conception of the church as corporate structure in the Middle Ages. Different theories of the church as corporate body were favored by different individuals but all agreed on one key component: the church was more than just its members and could maintain an existence perpetually, regardless of the death of any individual member. This, together with discussion as to the relationship between the head of a corporation (such as the Pope) and its members, contributed to the development of modern corporations and corporate theory The law classifies a corporation either as a corporation sole (one person) or as a corporation aggregate (any other number). 19 Development of Modern Commercial Corporations: Early commercial corporations were formed by governments to undertake tasks too risky or too expensive for individuals to embark upon. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company or the Hudson Bay Company, These corporations came to play a large part in the history of corporate colonialism In the 19th century, in the United States, corporate charters were closely regulated by the states. Forming a corporation usually required an act of legislature. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters. 20 Many private firms in the 19th century avoided the corporate model for these reasons and some formed Limited Partnerships. Eventually, state governments began to realise the greater corporate registration revenues available by providing more permissive corporate laws. New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state. Delaware followed, and soon became known as the most corporation-friendly state in the US after New Jersey raised taxes on the corporations, driving them out. New Jersey reduced these taxes after this mistake was realised, but by then it was too late; even today, most major public corporations are set up under Delaware law. 21 The 20th century saw a proliferation of enabling law across the world, which some argue helped to drive economic booms in many countries before and after World War I In the 1980s, many countries with large stateowned corporations moved toward privatisation the selling of publicly owned services and enterprises to corporations. Another major postwar shift was toward development of conglomerates (described as a large company or a multi-industry company) in which large corporations purchased smaller corporations to expand their industrial base. Japanese firms developed a horizontal conglomeration model, the keiretsu, which was later duplicated in other countries as well. 22 While corporate efficiency and profitability skyrocketed small shareholders control was diminished and directors of corporations assumed greater control over business. More recent corporate developments include downsizing, contracting-out or out-sourcing, off-shoring and narrowing activities to core business, as information technology, global trade regimes, and cheap fossil fuels enable corporations to reduce and externalise labor costs, transportation costs and transaction costs, and thereby maximise profits. 23 Legal Status: The existence of a corporation requires a special legal framework (body of law) grants the corporation legal personality (a fictional person, a legal person). Corporate statutes give corporations the ability to own property, sign binding contracts, pay taxes in a capacity that is separate from that of its shareholders "members". The legal personality has two economic implications: First: it grants creditors priority over the corporate assets upon liquidation. Second: corporate assets cannot be withdrawn by its shareholders, nor can the assets of the firm be taken by personal creditors of its shareholders. The regulations most favorable to include: 24 Limited liability 1. 2. Unlike in a partnership or sole proprietorship, shareholders of a modern business corporation have "limited" liability for the corporation's debts and obligations. Their potential losses cannot exceed the amount which they contributed to the corporation as dues or paid for shares. Limited liability regulations allows anonymous trading in the shares of the corporation by virtue of eliminating the corporation's creditors in such a transaction. 3. 4. Without limited liability, a creditor would not likely allow any share to be sold to a buyer of at least equivalent credit worthiness as the seller. Limited liability further allows corporations to raise funds for enterprises by combining funds from the owners of stock. Limited liability reduces the amount that a shareholder can lose in a company. This in turn greatly reduces the risk for potential shareholders. 25 Perpetual lifetime The assets and structure of the corporation exist beyond the lifetime of any of its shareholders, bondholders, or employees. This allows for stability and accumulation of capital, which thus becomes available for investment in larger size projects and over a longer term. It is important to note that the "perpetual lifetime" feature is an indication of the unbounded potential duration of the corporation's existence, and its accumulation of wealth and thus power. In theory, a corporation can have its charter revoked at any time, putting an end to its existence as a legal entity. However, in practice, dissolution only occurs for corporations that request it or fail to meet annual filing requirements. 26 Ownership and Control: Persons and other legal entities can have the right to vote or share in the profit of corporations. For-profit corporations, voters hold shares of stock and are thus called shareholders or stockholders. When no stockholders exist, a corporation may exist as a non-stock corporation, instead has members who have the right to vote on its operations. Not-for-profit corporation is when a non-stock corporation is not operated for profit. Corporations comprise a collective of individuals with a distinct legal status and with special privileges not provided to ordinary unincorporated businesses, to voluntary associations, or to groups of individuals. 27 1. 2. There are two broad classes of corporate governance forms in the world. In most of the world, control of the corporation is determined by a board of directors which is elected by the shareholders. In some jurisdictions, such as Germany, the control of the corporation is divided into two tiers with a supervisory board which elects a managing board. Germany is also unique in having a system known as co-determination in which half of the supervisory board consists of representatives of the employees. The president, treasurer, and other titled officers are usually chosen by the board to manage the affairs of the corporation. 28 In addition, corporations can be controlled (in part) by creditors such as banks. In return for lending money to the corporation, creditors can demand a controlling interest similar to that of a member, including one or more seats on the board of directors. In some jurisdictions, such as Germany and Japan, it is standard for banks to own shares in corporations Whereas in other jurisdictions such as the US and the UK banks are prohibited from owning shares in external corporation. 29 Members of a corporation are said to have a "residual interest." Should the corporation end its existence, the members are the last to receive its assets, following creditors and others with interests in the corporation. This can make investment in a corporation risky; however, shareholders receive the benefit of limited liability, making shareholders liable for only the amount they contributed. This only applies in the case of for-profit corporations. 30 Formation: Historically, corporations were created by special charter of governments. Today, corporations are usually registered with the state, province, or national government and become regulated by the laws enacted by that government. Registration is the main prerequisite to the corporation's assumption of limited liability. As part of this registration, it must in many cases be required to designate the principal address of the corporation and also be required to designate an agent or other legal representative of the corporation depending on the filing jurisdiction. 31 A corporation files articles of incorporation with the government, laying out: The general nature of the corporation, The amount of stock it is authorised to issue, The names and addresses of directors. Once the articles are approved the corporation's directors meet to create bylaws that govern the internal functions of the corporation such as meeting procedures and officer positions. The law of the jurisdiction in which a corporation operates will regulate most of its internal activities and finances. If a corporation operates outside its state, it is often required to register with other governments as a foreign corporation, and is almost always subject to laws of its host state. 32 Naming: Corporations generally have a distinct name. Historically, some corporations were named after their membership: Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership. In Canada (logical): many smaller corporations have no names at all, merely numbers based on their Provincial Sales Tax registration number (e.g., "12345678 Ontario Limited"). 33 In most countries, corporate names include the term "Corporation", or an abbreviation that denotes the corporate status of the entity. These terms vary by jurisdiction and language. In some jurisdictions they are mandatory, and in others they are not. The use of a name puts all persons on constructive notice that they have to deal with an entity whose liability of its shareholders is limited. Certain jurisdictions do not allow the use of the word "company" alone to denote corporate status, since the word "company" may refer to a partnership or to a sole proprietorship. 34 Unresolved Issues: The nature of the corporation continues to evolve, pushing new ideas and structures courts responding, and governments regulating in response to new situations. A question of long standing is that of diffused responsibility: e.g., if a corporation is found liable for a death, then how should the blame and punishment for this be allocated across the shareholders, directors, staff of the corporation, and the corporation itself? The present law differs among jurisdictions. Some argue that the shareholders should be ultimately responsible for such circumstances, forcing them to consider issues other than profit when investing, but the modern corporation may have many millions of small shareholders who know nothing about its business activities. This issue raises the question of the so-called "death penalty for corporations. 35 Types of Corporations: 1. 2. Most corporations are registered with the local jurisdiction as either a stock corporation or a non-stock corporation. Stock corporations sell stock to generate capital. A stock corporation is generally a forprofit corporation. Non-stock corporations do not have stockholders, but may have members who have voting rights in the corporation. Some jurisdictions (Washington, D.C., for example) separate corporations into for-profit and non-profit, as opposed to dividing into stock and non-stock. 36 For-Profit and Non-Profit: In modern economic systems, conventions of corporate governance commonly appear in a wide variety of business and non-profit activities. The laws governing these creatures of statute often differ, The courts often interpret provisions of the law that apply to profit-making enterprises in the same manner (or similar manner) when applying principles to non-profit organisations —> as the underlying structures of these two types of entity often resemble each other. 37 Closely Held and Public: Publicly traded corporation: where the shares of which are traded on a public market (e.g., the New York Stock Exchange or Nasdaq) designed specifically for the buying and selling of shares of stock of corporations by and to the general public. Most of the largest businesses in the world are publicly traded corporations. Closely held corporation: meaning that no ready market exists for the trading of shares. The majority of corporations are said to be closely held or privately held corporations Many such corporations are owned and managed by a small group of businesspeople or companies, although the size of such a corporation can be as vast as the largest public corporations. 38 Advantages: Closely held companies can often make companychanging decisions much more rapidly than a publicly traded company. Often communities benefit from a closely held company. A closely held company is far more likely to stay in a single place that has treated them well, even if going through hard times. The shareholders can incur some of the damage the company may receive from a bad year or slow period in the company profits. Closely held companies often have a better relationship with workers. Publicly traded companies often have more working capital and can delegate debt throughout all shareholders. 39 Disadvantages: Publicly traded companies are at the mercy of the market, having capital flow based not only on what the company is doing but the market and even what the competitors are doing. Publicly traded companies often comes under extreme scrutiny if profit and growth are not evident to stockholders thus stockholders may sell, further damaging the company. This is enough to make a small public company fail. In publicly traded companies, often when a year has gone badly the first area to feel the effects are the work force (worker hours, wages or benefits being cut). In closely held businesses the shareholders can incur profit damage. 40 The affairs of publicly traded and closely held corporations are similar in many respects. The main difference in most countries is: Publicly traded corporations have the burden of complying with additional scrutinies laws, which (especially in the U.S.) may require additional periodic disclosure, stricter corporate governance standards, additional procedural obligations in connection with major corporate transactions (e.g. mergers) or events (e.g. elections of directors). 41 Mutual Benefit Corporations: A mutual benefit nonprofit corporation is formed solely for the benefit of its members. e,g., is a Golf Club. Individuals pay to join the club, memberships may be bought and sold, and any property owned by the club is distributed to its members if the club dissolves. The club can decide, in its corporate bylaws, how many members to have, and who can be a member. While it is a nonprofit corporation, a mutual benefit corporation is not a charity. Therefore, it cannot obtain status. If there is a dispute as to how a mutual benefit nonprofit corporation is being operated, it is up to the members to resolve the dispute since the corporation exists to solely serve the needs of its membership and not the general public. 42 Multinational Corporations: Following on the success of the corporate model at a national level, many corporations have become transnational or multinational corporations: “growing beyond national boundaries to attain sometimes remarkable positions of power and influence in the process of globalisation.” The typical "multinational" may fit into a web of overlapping shareholders and directorships, with multiple branches and lines in different regions, many such sub-groupings comprising corporations in their own right. In the spread of corporations across multiple continents, the importance of corporate culture has grown as a unifying factor and a counterweight to local national sensibilities and cultural awareness. 43 Corporate Taxation: In many countries, including the US and UK, corporate profits are taxed at a corporate tax rate, and dividends (payments) paid to shareholders are taxed at a separate rate. Such a system is sometimes referred to as "double taxation", because any profits distributed to shareholders will eventually be taxed twice. One solution to this (in Australia and UK tax systems) is for the recipient of the dividend to be entitled to a tax credit which addresses the fact that the profits represented by the dividend have already been taxed. The company profit being passed on is therefore effectively only taxed at the rate of tax paid by the eventual recipient of the dividend. 44 Criticisms of Corporations: Adam Smith criticised the idea of separation of ownership and management in a joint-stock company (corporations). The directors of such companies being the managers rather of other people’s money than of their own. It cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partner frequently watch over their own. Negligence, therefore, always prevail, more or less, in the management of the affairs of such a company. 45 The context for Adam Smith’s term was applied to 18th century joint-stock companies where a distinct entity created by the King of England as Royal Charter trading companies. During that time, bribery and corruption were inherent in this type of corporate model as the local managers sought to avoid supervision by the Courts of Governors, politicians, and Prime Ministers. In these circumstances, Smith did not consider joint-stock company governance to be honest. 46 Professor of Law at the University of British Columbia Joel Bakan describes the modern corporate entity as 'an institutional psychopath' and a 'psychopathic creature.' Bakan claims that corporations, when considered as natural living persons, exhibit the features of antisocial personality disorder or psychopath. 47 Noam Chomsky, linguist, describes the corporate structure or an industry as being fascist. It has tight control at the top and strict obedience has to be established at every level there's a little bargaining, the line of authority is straightforward. “I'd love to see centralised power eliminated, whether it's the state or the economy, and have it diffused and ultimately under direct control of the participants.” Chomsky has also criticised the legal decisions that led to the creation of the modern corporation: Corporations, which had been considered artificial entities with no rights, were accorded all the rights of persons, and far more, since they are "immortal persons", and "persons" of extraordinary wealth and power. Furthermore, they were no longer bound to the specific purposes designated by State charter, but could act as they choose, with few constraints. 48 Other Business Entities: 49 First: Consumers' Cooperative: Consumers' cooperative is a cooperative business owned by its customers for their mutual benefit. It is a form of free enterprise that is oriented toward service rather than pecuniary profit. The customers (consumers) are often the individuals who have provided the capital required to launch or purchase that enterprise. There are many types of consumers' cooperative health care, insurance, and housing as well as agricultural and utility cooperatives. 50 The difference between consumers' cooperatives and other businesses is the purpose of a consumers' cooperative is to provide quality goods and services at the lowest cost. In practice consumers' cooperatives price goods and services at competitive market rates. The difference is that a for-profit enterprise will treat the difference between cost (including labor, etc.) and selling price as financial gain, the consumer owned enterprise returns this sum to the consumer/owner as an overpayment. 51 Large consumers' cooperatives are run much like any other business and require workers, managers, clerks, products, and customers to keep the doors open and the business running. In smaller businesses the consumers/owners are often workers as well. Consumers' cooperatives may, in turn, form Cooperative Federations. These may come in the form of cooperative wholesale societies, (Consumers' Cooperatives collectively purchase goods at wholesale prices) and, in some cases, own factories. 52 Governance: Consumers' cooperatives utilise the cooperative principle of democratic member control, or one member/one vote. Most consumers' cooperatives have a board of directors elected by and from the membership. The board is responsible for hiring management and ensuring that the cooperative meets its goals, both fiscal and otherwise. Most consumers' cooperatives hold regular membership meetings (often once a year). As mutually-owned businesses, each member of a society has a shareholding equal to the sum they paid in when they joined. 53 Role of Government: In consumers' cooperatives, member owners provide all pecuniary input and recover all forms of return from the enterprise. The transparent nature of democratic cooperation generates an open business environment that virtually eliminates any need for external government inspection or intervention. Some claim that surplus payment returns to consumer/owner should be taxed the same as dividends paid to corporate stock holders, Others argue that consumer cooperatives do not return a profit by traditional definition, and similar tax standards do not apply. 54 Problems of Consumers' Cooperatives: Since consumers' cooperatives are run democratically, they are subjected to the same problems typical of democratic government. Difficulties can be minimised or eliminated by frequently providing member/owners with reliable educational materials regarding current business conditions. It is worth mentioning that consumers' cooperative has been a focus of study in the field of Cooperative Economics advocating such organisational forms, claiming a broad set of benefits including economic democracy and justice, transparency, greater product purity, and financial benefits for consumers. 55 Second: Partnership: A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation. 56 Third: Limited Partnership: A limited partnership is similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). As in a general partnership: The GPs have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership. The GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties in the ordinary course of the partnership's business. 57 Like shareholders in a corporation, the LPs have limited liability they are only liable on debts incurred by the firm to the extent of their registered investment, and they have no management authority. The GPs pay the LPs the equivalent of a dividend on their investment, the nature and extent of which is usually defined in the partnership agreement. Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability. 58 Limited Liability: When the partnership is being constituted or the firm is changing, LPs are generally required to file documents with the relevant state registration office. LPs must also explicitly disclose their LP status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. Documents and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, the LPs do not have expected agency authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppel or acts of ratification by the firm create ostensible authority. 59 History: The earliest limited partnerships were arose in Rome in the third century B.C. During the heyday of the Roman Empire they were roughly equivalent to today's major corporations: many had hundreds of investors. However, they required at least one partner with unlimited liability. In medieval Italy, the concept was revived around the 10th century was called the commenda, “a business organisation which was generally used for financing maritime trade.” In a commenda, the traveling trader of the ship had unlimited liability, but his investment partners on land were shielded. Napoleonic Code of 1807 reinforced the limited partnership concept in European law. In the US, limited partnerships became widely available in the early 1800s. Britain enacted its first limited partnership statute in 60 1907. Fourth: Limited Liability Partnership: A limited liability partnership (LLP) has elements of partnerships and corporations. In an LLP, all partners have a form of limited liability, similar to shareholders of corporations As a result the LLP is more suited for businesses where all investors wish to take an active role in management (the partners have the right to manage the business directly) There is considerable confusion between LLPs in the US and that introduced in the UK in 2001 - since the UK LLP is, despite the name, specifically legislated as a Corporate body rather than a Partnership. 61 Fifth: Limited Liability Limited Partnership: The limited liability limited partnership (LLLP) is a relatively new modification of the limited partnership. An LLLP is a limited partnership and as such consists of one or more general partners and one or more limited partners. The general partners manage the LLLP, while typically the limited partners only have a financial interest. The difference between an LLLP and a LP is In a limited partnership the general partners are jointly and severally liable for the debts and obligations; limited partners are not liable for those debts and obligations beyond the amount of their respective capital contributions. 62 In an LLLP, by having the limited partnership make an election under state law, the general partners are afforded limited liability for the debts and obligations of the limited partnership that arise during the period that the LLLP election is in place. Because the LLLP is so new, its use is not widespread. 63 Sixth: Limited Liability Company: A limited liability company (LLC) is “a legal form of business company offering limited liability to its owners.” It is similar to a corporation, and is often a more flexible form of ownership, especially suitable for smaller companies with a limited number of owners. Advantages: No requirement of an annual general meeting for shareholders. No loss of power to a board of directors. Much less administrative paperwork and recordkeeping than a corporation. 64 An LLC can elect to be taxed as a sole proprietor, partnership, or corporation, providing much flexibility. No double taxation, unless the LLC elects to be taxed as a corporation. Profits are taxed personally at the member level, not at the LLC level. Limited liability, meaning that the owners of the LLC, called "members," are protected from some liability for acts and debts of the LLC. LLCs in some states can be set up with just one natural person involved. LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members. 65 Seventh: Limited Company: 1. 2. 3. A limited company in the UK is a corporation whose liability is limited by law. There are three main types of limited companies: Private company limited by shares (Ltd.) Private company limited by guarantee: this type of company does not have share capital but is guaranteed by its "members", who agree to pay a fixed amount in the event of the company's liquidation. Frequently charities incorporate using this form of limited liability. Public limited company (PLC): public limited companies can be publicly traded on a stock exchange (similar to the U.S. Corporation). 66 Ninth: Sole Proprietorship: Proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability do not apply to sole proprietors. All debts of the business are debts of the owner that the owner has no partners. A sole proprietorship means “a person does business in his or her own name and there is only one owner.” The person who organised the business pays personal income taxes on the profits made, making accounting much simpler. (No double taxation) Most sole proprietors will register a trade name. This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions. 67 Tenth: Trust Company: A trust company is normally owned by one of three types of structures: (1) an independent partnership, (2) a bank, or (3) a law firm, each of which specialises in being a trustee of various kinds of trusts, and managing estates. The "trust" name refers to the ability of the institution's trust department to act as a trustee – “someone who administers financial assets on behalf of another.” A trustee will manage investments, keep records, manage assets and prepare court accountings, paying bills and (depending on the nature of the trust) medical expenses, charitable gifts, inheritances or other distributions of income. 68
© Copyright 2024