Exercise 1: Providing Legal Opinion based on appropriate business structure

Sir,

Sub Legal Opinion on appropriate business

: structure

Background

This has reference to the guidance on the most appropriate business structure which you
should adopt while starting the new venture based on your query

Queries

1. Minimise Personal Liability: Having worked as a skilled freelance software developer, I

have accumulated some savings but want to minimise personal liability, considering the
potential risks associated with the software business.

2. Ease of Growth in the Future: In envisioning the structure of my business, I plan to start
small but have plans for growth in the future. I am eager to understand how to structure my
business for scalability and expansion without encountering excessive complications.

3. Simple Management Structure and Decision-Making Control: A simple management

structure is a priority for me, as I prefer to retain control over decision-making processes.
This, I believe, will allow for more agility and adaptability as my business evolves.

4. Tax Implications: I would like to optimize the tax considerations for my venture.

Responses to Queries :
One person Company is the most viable solution according to the facts above-mentioned
in the mail

Response to Query 1

Minimise Personal Liability: An OPC provides a sole proprietor with an opportunity to

establish a company. It is considered a private company with limited liability.

Response to Query 2
Ease of Growth in the Future : A simplified regime for OPC encourages start-ups and
entrepreneurs to do business under a corporate structure in an organised manner that can help
them to scale and grow.

Response to Query 3
Simple Management Structure and Decision-Making Control: The primary advantages of
OPC include complete control, lesser compliance burden coupled with limited liability for the
founder. It allows OPCs to grow without any restrictions on paid-up capital and turnover,
allowing their conversion into any other type of company such as a private limited company
which requires a minimum of two people and a two-person board of directors

Response to Query 4
Tax Implications: The tax rate is flat 30%, other tax provisions like MAT & Dividend
Distribution Tax (DDT) apply as they apply to any other form of company.

Assumptions/ Disclaimers
If there are any assumptions or disclaimers based on which you have issued the opinion, e.g.
the assumption that the management has provided correct copies of resolutions, or that certain
Management Representatives (MR) have provided information on telephonic conversations
and you have assumed it to be true, state the same.

We hope that the above shall suffice for your present purposes. We shall be happy to provide
a detailed analysis of the issues considered herein, should you so require. Please do not
hesitate to contact us for any clarifications.

Yours truly,

Dr Mohamed Musthafa Al Azeez

Advocate,MM Associates ,
New Delhi.
Exercise 2: You are a legal consultant at a boutique firm specializing in advising
startups and small businesses. A young couple, Maya and David, approach you seeking
guidance on selecting the best business structure for their new venture, "Flourish &
Bloom," a floral design and event planning business. Maya and David plan to start
small, offering local flower arrangements and event decoration services initially, with
aspirations to expand into wedding planning and workshops in the future. They
anticipate moderate initial investment and steady growth over the next five years. They
prioritize personal liability protection and flexibility in taxation and management.

1. Briefly explain the four main types of business structures and their key
characteristics (formation, liability, taxation, and management).

1. Sole proprietorship
A sole proprietorship is the most common type of business structure. a sole proprietor “is
someone who owns an unincorporated business by himself or herself.” The key advantage in
a sole proprietorship lies in its simplicity. Here, there is no distinction between the business
and the individual who owns it — which means that the owner is entitled to all profits.
However, it also means that the sole proprietor is responsible for all the business’s debts,
losses and liabilities. This means that creditors or lawsuit claimants may have access to the
business owner’s personal accounts and assets if the business accounts cannot cover the debt.
Examples of sole proprietorship include freelance writers, independent consultants, tutors and
caterers.
Overview of liabilities
Liabilities are defined as a company’s financial debts or obligations that arise during business
operations.

Limited liability is a type of legal structure where a corporate loss will not exceed the amount
invested in a partnership or LLC. In other words, investors’ and owners’ private assets are not
at risk if the company fails. So, if a company with limited liability is sued, then the claimants
are suing the company; personal assets can’t be touched.

Whereas personal liability is when a business owner’s assets can be used to satisfy any
business debts.

However, "piercing the corporate veil" is the most common in close corporations to settle
debts and can occur when serious misconduct takes place. This is when courts put aside
limited liability and hold a company’s shareholders personally liable for the corporation’s
actions or debts.

Pass-through entity
In terms of tax implications, sole proprietorships are considered a “pass-through entity.” Also
known as a “flow-through entity” or “fiscally transparent entity,” this means that the business
itself pays no taxes. Instead, taxes are “passed through” to the owner. Pass-through entities
are not subject to corporate income tax.

2. Partnership
In business structure, a partnership is(opens in new tab) “the relationship existing between
two or more persons who join to carry on a trade or business.”

General partnership: Consists of two or more partners who share all liability and
responsibility equally. This means the partners both take part in the day-to-day operations of
the business. It also means that the partners are equally liable for any debts generated by the
business. All partners are considered “general partners.”
Like a sole proprietorship, partnerships are considered a pass-through entity when it comes to
taxation. In many ways, a partnership is like an expanded sole proprietorship — but with the
advantages and disadvantages that comes with a partner. A partner can provide expertise,
skills and capital for the business. But while they can affect the business positively, they can
also impact it negatively. You should be comfortable with whomever you enter into business
with.

Partnership tax returns are due the fifteenth day of the third month after the end of the entity’s
tax year, which is typically March 31st.

3. Limited liability company

Now, a limited liability company (LLC) is where things start to get a little dicey. That means
it is formed under state law and the regulations surrounding LLCs vary from state to state.
An LLC is considered a hybrid legal entity because it has traits of numerous other business
structures, depending on the elections made by the owners. This lends it more protections and
flexibility than some of its business structure counterparts. From a protections perspective,
members of an LLC are not personally liable. Because the LLC is an entity created by state
statute, it has flexibility in regards to federal tax treatment.

4. Corporation
Corporations are a company or group of people authorized to act as a single legal entity. This
means that the company is considered separate and distinct from its owners (i.e. there’s no
personal liability here). However, a corporation is eligible for many of the rights that
individuals possess, hence why it is sometimes referred to as a “legal person “(opens in new
tab) For instance, a corporation can sue or be sued, enter into contracts and is entitled to free
speech.
2.Analyze the suitability of each structure for "Flourish & Bloom" based on the
provided information about the business and the couple's priorities.

a) Partnership firm doesn’t suit the above business situation as it has the unlimited
liability.
b) Sole proprietorship is meant for a business undertaking undertaken by single
person. As the given situation has two persons , it doesn’t suit it.
c) Limited Liability Partnership is the right choice for the “Flourish & Bloom “as LLP
form is a form of business model which is organized and operates on the basis of an
agreement, provides flexibility without imposing detailed legal and procedural
requirements and enables professional/technical expertise and initiative to combine
with financial risk-taking capacity in an innovative and efficient manner.
d) Company : As it has moderate initial investment, its not sufficient to start a private
limited company and in addition to it , it has high statutory compliance requirements.

3. Create a table comparing the advantages and disadvantages of each structure in

the context of this specific scenario.

Sole Proprietorship

A big advantage of a sole proprietorship is the high level of autonomy the owner has to run
his business. There are no other owners to divide profits with, which allows a sole
proprietor to use company funds in any manner. Sole proprietors have relatively few
formalities to adhere to and very little regulation from federal, state and local government.
However, a major disadvantage of a sole proprietorship concerns the lack of liability
protection for the business owner. This means a sole proprietor has a personal responsibility
to pay every business debt and obligation.

Partnership

A partnership of two or more individuals has the ability to collaborate. Partners can share
the responsibility of managing the company and share ideas with other partners. Also,
partners are not required to file income taxes as a business entity, meaning each partner
reports his share of business profits and losses on his personal income tax return. On the
other hand, a partnership offers no personal asset protection for partners of the business. A
partner may be even liable for the negligent acts of another partner. If the partnership's
business assets do not cover an obligation, a creditor may pursue a partner’s personal assets
as compensation for the business debt.
LLC

A limited liability company is a hybrid business entity that provides members with limited
liability protection from company debts and obligations. Also, members of an LLC are able
to divide company profits in any manner, regardless of ownership in the company. This
flexibility allows an LLC to allocate profits and losses to the greatest tax benefit of the
company’s members. However, a LLC is costly to form and may not be able to raise capital
because it cannot issue stock like a corporation. This means an LLC may have to rely on
the personal assets of its members to fund the company’s activities.

Corporation

Corporations provide shareholders, directors and officers limited liability protection for
company obligations. A shareholder’s liability for company debts does not extend beyond
his investment in the business. Another advantage of a corporation is the company’s ability
to raise capital by issuing stocks and bonds. The proceeds of a stock or bond issuance can
be used to expand or pay the company’s existing obligations. The downside is double
taxation. A corporation must file a business tax return with the Internal Revenue Service
and pay taxes on company profits at the company’s applicable corporate tax rate. Later,
when the company distributes dividends to its shareholders, the shareholders must pay taxes
on dividends received from the business at their personal income tax rates.

4. Considering the analysis in step 1, recommend the optimal business structure for
"Flourish & Bloom.".

Limited Liability Partnership is the right choice for the “Flourish & Bloom “as LLP form is a
form of business model which:
(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk-
taking capacity in an innovative and efficient manner

5. Justify your recommendation by addressing the specific needs and priorities of

Maya and David in terms of liability protection, taxation, and management
flexibility.

Liability Protection : Under LLP structure, liability of the partner is limited to his
agreed contribution. Further, no partner is liable on account of the independent or un-
authorized acts of other partners, thus allowing individual partners to be shielded from
joint liability created by another partner's wrongful acts or misconduct.
Taxation : LLP is taxed at 30% up to an income of 1 crore and a 12% surcharge if the
total income exceeds 1 crore. Companies must pay tax at 25% if turnover is up to 400
crores otherwise 30% is applicable.

Management flexibility : LLP is an alternative corporate business form that gives the
benefits of limited liability of a company and the flexibility of a partnership. The LLP
can continue its existence irrespective of changes in partners. It is capable of entering
into contracts and holding property in its own name.