Lecture 2

Business structures
 Business structures
Business structure
It is a category of organization that is legally recognized in a
given jurisdiction and characterized by the legal definition of that
particular category.
Common business structures includes:
• Sole proprietorship
• Partnership
• Limited liability company (LLC)
• Corporation
• Cooperative
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1. Sole proprietorship
The most common business structure type. A sole proprietorship is
owned and operated by one person, a sole proprietor. A sole
proprietorship is a good option if you are looking to have complete
control of your business.
Sole proprietorships do not produce a separate business entity.
Your business assets and liabilities are not separate. Sole
proprietors include both their business expenses and personal
income on their personal tax return.
Sole proprietors are liable for the business’s liabilities, debt, and
losses. If your business goes into debt, your personal assets may
be at risk.
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A person running a sole proprietorship is called a sole trader, he
is a self-employed person who owns and runs their own business
as an individual. A sole trader business doesn’t have any legal
identity separate to its owner, leading many to say that as a sole
trader you are the business
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When setting up a company, the Pty Ltd is short for “Proprietary
Limited”. This is a company that operates privately, and has not
offered shares to the general public. The owners of such a
company limit ownership to no more than 50 non-employee
shareholders.
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2. Partnership
A partnership is a business that two or more individuals own and
operate together. Partnerships can be considered either
• general partnerships
• limited partnerships
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2.1General partnership
A general partnership is owned by two or more people. In
general partnerships, the partners manage the business and
assume responsibility for the partnership’s debts. Partners have
equal shares of all profits and losses.
General partnerships allow partners to work as co-owners.
Consider creating a partnership agreement to lay out the
specific shares for each partner if you plan on starting a general
partnership.
Profits in general partnerships are only taxed at the personal
income level.
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What is partnership agreement?
A partnership agreement is a contract between partners in a
partnership which sets out the terms and conditions of the
relationship between the partners, including:
• Percentages of ownership and distribution of profits and
losses
• Description of management powers and duties of each
partner
• Term (length) of the partnership
• How the partnership can be terminated
• How a partner can buy his/her share of the partnership.
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A partnership agreement should be prepared when you start a
partnership. An attorney should help you with the partnership
agreement, to make sure you include all-important "what if"
questions and avoid problems when the partnership ends.
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What Is a Limited Company (LC)?
A limited company (LC) is a general form of incorporation that
limits the amount of liability undertaken by the company's
shareholders. It refers to a legal structure that ensures that the
liability of company members or subscribers is limited to their
stake in the company by way of investments or commitments. In a
legal sense, a limited company is a person.
The naming convention for this type of corporate structure is
commonly used in the United Kingdom, where a firm's name is
followed by the abbreviated "Ltd." In the United States, limited
companies come in several forms, including the limited liability
corporation (LLC).
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Limited Company Benefits
1. Minimizing personal liability
2.  Professional status
3. Tax efficiency and planning
4.  Higher personal remuneration
5. Separate legal identity
6. Credibility and trust
7. Investment and lending opportunities
8. Protecting a company name
9.  Pensions
10. Splitting income
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Disadvantages of limited company
• personal and corporate information will be disclosed on public
record
• strict procedures must be followed when withdrawing money from
the business
• limited companies must be incorporated at Companies House
• you will be required to pay an incorporation fee to Companies
House
• company registers and records must be maintained and made
available for public inspection at your registered office
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A Memorandum of Association (MOA) is a legal document
prepared in the formation and registration process of a limited
liability company to define its relationship with shareholders.
The main purpose of the memorandum is to explain the scope of
activities of the company. The prospective shareholders know
the areas where the company will invest their money and the
risk they are taking in investing the money.
The outsiders will understand the limits of the working of the
company, and their dealings with it should remain within the
prescribed scope.
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2.2 Limited partnership
A limited partnership has both general and limited partners. You
need at least one general and one limited partner to start a
limited partnership.
Limited partners only serve as investors for the business and
typically have no business decision rights. General partners own
and operate the business while assuming liabilities for the
partnership. As a general partner, you have control and
responsibility. Limited partners get ownership without taking on
the responsibility and risks.
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The Pros and Cons of a Partnership
Advantages
• You have extra sets of hands to help get the job done
• You benefit from additional knowledge brought in by partners
• Less financial burden
• Less paperwork
• Fewer tax forms
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Disadvantages
• You cant make decisions on your own
• You will have disagreements
• You will split profits
• You aren't separate from your business
• You are taxed individually
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3. Corporation
3.1 C corp
A corporation, sometimes called a C corp, is a legal entity that's separate
from its owners. Corporations can make a profit, be taxed, and can be
held legally liable.
Corporations offer the strongest protection to its owners from personal
liability, but the cost to form a corporation is higher than other structures.
Corporations also require more extensive record-keeping, operational
processes, and reporting.
Unlike sole proprietors, partnerships, and LLCs, corporations pay income
tax on their profits. In some cases, corporate profits are taxed twice —
first, when the company makes a profit, and again when dividends are
paid to shareholders on their personal tax returns.
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Corporations have a completely independent life separate from
its shareholders. If a shareholder leaves the company or sells his
or her shares, the C corp can continue doing business relatively
undisturbed.
Corporations have an advantage when it comes to raising capital
because they can raise funds through the sale of stock, which
can also be a benefit in attracting employees.
Corporations can be a good choice for medium- or higher-risk
businesses, businesses that need to raise money, and businesses
that plan to "go public" or eventually be sold.
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3.2 S corp
An S corporation, sometimes called an S corp, is a special type of
corporation that's designed to avoid the double taxation
drawback of regular C corps. S corps allow profits, and some
losses, to be passed through directly to owners' personal income
without ever being subject to corporate tax rates.
Not all states tax S corps equally, but most recognize them the
same way the federal government does and taxes the
shareholders accordingly. Some states tax S corps on profits
above a specified limit and other states don't recognize the S
corp election at all, simply treating the business as a C corp.
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4. Cooperatives
Cooperatives are people-centred enterprises owned, controlled and run by and
for their members to realize their common economic, social, and cultural needs
and aspirations.
Cooperatives bring people together in a democratic and equal way. Whether the
members are the customers, employees, users or residents, cooperatives
are democratically managed by the 'one member, one vote' rule. Members share
equal voting rights regardless of the amount of capital they put into the
enterprise. 
As businesses driven by values, not just profit, cooperatives share internationally
agreed principles and act together to build a better world through cooperation.
Putting fairness, equality and social justice at the heart of the enterprise,
cooperatives around the world are allowing people to work together to
create sustainable enterprises that generate long-term jobs and prosperity.
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Process of company registration
• Reservation of company name
 Reservation fee of P20.00 is payable upon submission of company
name and for business name.
Upon confirmation that the proposed company/business name is
available, Company registration forms should be submitted.
Forms require:
• Directors’ personal details
• Residential address – plot number, location, ward, village or town;
and Full postal address.
• If a representative is applying on behalf of the applicant, a letter
authorizing the representative should be submitted.
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The following documents should be submitted:
• Form 2 and Form 3 for a company limited by shares;
• Form 2A and Form 3 for a closed company;
• Form 2B and Form 3 for a company limited by guarantee;
• Form 3 (declaration) to be filled by a qualified Company Secretary recognized by the Act
or a Director/member of a company;
• The person presenting the application should provide their address, telephone or mobile
numbers in the spaces provided;
• The person presenting the application should attach certified copies of their identity
card or passport
• Certified copies of identity documents for the proposed directors and shareholders and
a practicing certificate for the Company Secretary;
• Two (2) original bound sets of all documents are required
• P360.00 registration fee of payable upon submission and acceptance of registration
documents
• In case of a business, name registration form RBN 2 should be completed and submitted
with a copy of the applicant’s identity document and P150.00 registration fee.