7 8 - Types of Business Ownerships and Legal Issues

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 1
SCOPE
• Understand and discuss about the different types of legal

structures under which a business may operate
• Examine pros and cons of various
legal structures
• Review various forms of intellectual property

RECAP
• Understand the relevance financial documents for first year of

operation.
• Identify various financial statements
for small businesses.
• Analyse the break even point for a start up.

PATHWAYS OF ENTERING INTO A BUSINESS
Starting you own business:

The first option that usually
springs to mind for most

budding small business owners
or entrepreneurs is
starting their own business Source: https://www.xibms.com/blog/things-to-keep-in-mind-before-starting-your-own-business/
operations as a totally new

venture.
Starting you own business:

ADVANTAGES DISADVANTAGES
•Ability to determine
•Challenge in raising capital
business directions •Lack of an established
•Flexibility
customer base
•Cost minimization •Cash flow shortages
•Lifestyle goals •Learning curve expenses

Purchasing an existing
business:
Sometimes commercial goals
and ambitions are best
fulfilled by the acquisition of a Source: https://www.seekbusiness.com.au/business-resources/why-buying-a-business-is-better-than-starting-

one-from-scratch
firm that is already operating.

Purchasing an existing business :
•Successful existing businesses often continue to be •Employees inherited with the business may not be
successful. suitable.
•Superior location and Employees & suppliers are in •Obsolete or inefficient equipment and facilities
place. •Chances of obsolete inventory
•Installed equipment with known production capacity •Worthless accounts receivable may be worth less than
•Inventory in place and Trade credit is established face value.
•The new owner can use the experience of the previous •The business may be overpriced.
owner
•Easier access to financing

Franchising:
A form of business organization in which
a firm that already has a successful
product or service (franchisor) licenses its
trademark and method of doing business
to another business or individual

Source: https://www.entrepreneur.com/article/322060
(franchisee) in exchange for a franchise
fee and an ongoing royalty payment.

Franchising :
•Support of franchisor
•Profit sharing.
•Much experience is not • High fee
required • Friction with franchisor
• Brand is already established • Lack of control
• Easy credit availability
• Good relations with supplier

TYPES OF BUSINESS OWNERSHIPS- LEGAL STRUCTURES
Sole Proprietorship

Partnership
Company

Sole Proprietorship:
•A Sole Proprietorship, is a business in which
the owner is synonymous with the firm.
•All profits and assets are the owner’s , just as

any liability or debts are also the responsibility
of the owner.
•Tax-related and other legal compliances are
minimal.
Source: https://www.quora.com/How-much-investment-is-needed-to-start-a-sole-manufacturing-company
•It is much easier to start and dissolve the firm.

Sole Proprietorship :
ADVANTAGES DRAWBACKS
•Unlimited liability
•Ease of formation
•Total control over the business •Limited resources
• Relatively cheap to setup and •Lack of continuity
• maintain •Tax
•Few regulations

Partnership:
When several people are in business

together, this business relationship is
called partnership.
These people pool their resources,

such as capital, time and knowledge,
and agree to share the profits as well Source: https://blog.ipleaders.in/comparison-limited-partnership-lp-limited-liability-partnership-llp/
as the liabilities of the venture.

Partnership:
ADVANTAGES
DRAWBACKS

•Ease of formation
•Unlimited joint liability
•Ease of operation
•Potential conflicts
•Combined resources
•Lack of continuity
•Direct rewards

Partnership:
TYPE OF PARTNERSHIP FIRMS IN INDIA:
Indian Partnership Act, 1932 allows a firm to be formed and executed by entering into
Partnership Agreement. Further, it provides types of Partnership Firm as Unregistered
Partnership Firm or Registered Partnership Firm. Whether the firm is registered or not
the Partnership firm is legal in the eyes of Law.
1. Unregistered Partnership Firm
2. Registered Partnership Firm

Partnership:
1. Unregistered Partnership Firm:
The Unregistered Partnership Firm is established by entering into

agreement by the partners of the proposed firm.
The Unregistered Partnership Firm as stated to be legal allows the partners
to carry on the business in manner stated and provided in the agreement.

Partnership:
2. Registered Partnership Firm:
The Partnership Firm is to be registered with the Registrar of Firm (RoF)

having jurisdiction over the Place of Business of the Firm.
The registration of Partnership firm involves payment of Government

fees to Registrar, varied from state to state according to the State Law.

Partnership:
The registration of partnership firm is preferable, as the unregistered

partnership firm cannot sue the third party or contracting party and vice-versa.
Also, the partners, in case of internal disputes or issues, cannot approach the
court and shall resolve the disputes with the help of arbitrator or alternate
dispute resolution mechanism.

Partnership:

How to register as partnership firm in
India?
https://cleartax.in/s/partnership-registra
Company:
•A company is a separate legal entity, that has an

existence independent of its owners and manages.
•Ownership is held by a number of shareholders, who may

transfer shares to other people and who elect a number of
their own members to serve as directors of the company.
•The directors are responsible for setting the broad policies
of the firm, selecting and overseeing a chief executive
officer or managing director, and ensuring solvency and Source: http://www.digitalicon.com.sa/
legal compliance.

Company:
ADVANTAGES DRAWBACKS
•High set-up and maintenance cost

•Perpetual existence
•Limited liability •Spread ownership
•Rights of a natural person

Company:
Types of Company registration in India
1. One Person Company (OPC)

2. Limited Liability Partnership (LLP)
3. Private Limited Company (PLC)
4. Public Limited Company (PLC)

Company:
1. One Person Company (OPC)

Recently introduced in the year 2013, an OPC is the best
way to start a company if there exists only one promoter or
owner. It enables a sole-proprietor to carry on his work and
still be part of the corporate framework.

Company:
2. Limited Liability Partnership (LLP)
A separate legal entity, in an LLP the liabilities of partners are only limited
to their agreed contribution.

Company:
3. Private Limited Company (PLC)
• As per the provisions of the Companies Act 2013, there can be a minimum of 2 members

and a maximum of 200 members in a company.
•There are a group of shareholders and the total capital is made up of shares withheld by
each member. The liability of members is limited to the number of shares held by them.
• Business assets and personal assets are treated separately.
• Shares of a Private Limited Company can be sold or transferred to individuals, who in
turn become owners of the company

Company:
4. Public Limited Company (PLC)
• A Public Limited Company shares can be purchased by the general public. The

company must have 3 directors and a minimum of 7 shareholders. In a Public Limited
Company, there is no limit on the number of shares.

• The shares are listed on the stock exchange and can be traded freely. Such companies
are owned by their shareholders. Companies under this category require a certificate
from the Registrar of Companies (ROC) before starting their business operations.

COMPARING LEGAL STRUCTURES

OTHER FORMS
A not-for-profit corporation (sometimes called a nonprofit) is an
organization formed to serve some public purpose rather than for
financial gain. As long as the organization’s activity is for charitable,

religious, educational, scientific, or literary purposes, it can be exempt
from paying income taxes. Additionally, individuals and other
organizations that contribute to the not-for-profit corporation can take
a tax deduction for those contributions.

EXPERIANCIAL EXERCISE
On next page, you will see a list of advantages and disadvantages,
associated with sole proprietorship, partnerships and corporations.
Place an S next to those that relate to sole proprietorships, a P

next to those that relate to partnerships and a C next to those
that relate to companies.
If the advantage or disadvantage applies to more than one type of
organisational form, put all answers on the accompanying line

EXPERIANCIAL EXERCISE

INTELLECTUAL PROPERTY
What is Intellectual Property?
Putting simply, it is a collective term for patents, trademarks,
copyrights, design rights, trade secrets and other similar rights.

According to the WIPO (World Intellectual Property
Organization ) website, “intellectual property refers to
creations of the mind”

INTELLECTUAL PROPERTY
IP law covers a set of rights in works, inventions,

ideas and information and how they are expressed or
used, and the ways in which the products of companies
are recognized by consumers and in the marketplace.
As a general rule, intellectual property laws prevent or
set limits on copying or use of these types of rights.
FORMS OF PROTECTION
There are Four Forms of Protection:

• Patents
• Trade Secrets
• Trademarks
• Copyrights
Source: https://www.themyerslg.com/blog/2019/06/what-do-to-if-someone-is-infringing-on-your-
intellectual-property-rights/

FORMS OF PROTECTION
Patents
A patent is an intellectual property
right that provides the owner with

exclusive rights to hold, transfer and
license the production and sale of the
product or process (Kuratko and Source: http://ipo.gov.tt/related-links-patents/application-procedure-for-a-patent/
Hodgetts)

FORMS OF PROTECTION
Kinds of Patents
1. Utility Patents: Cover mechanical or general inventions,
chemical inventions, & electrical inventions

2. Design Patents : Cover the “appearance” of items (e.g.,
sports uniforms, electronic products, & autos)
3. Plant Patents: Protect discoveries of reproduction methods of
new plant varieties

FORMS OF PROTECTION
Trade Secrets
Trade secrets are a form of property that
exists in information of value that has
been kept secret or, where disclosed, that
disclosure is subject to agreement by the
recipients to keep the information
Source: https://patentrebel.com/trade-secret-vs-patent-protection/
confidential (e.g., formulas, processes,

customer lists, etc.)

FORMS OF PROTECTION
Trade Secrets
Why Consider Protection as a Trade Secret instead of as a Patent?

• Trade secret law can sometimes protect inventions that did not
qualify for patents
• Some inventors want to avoid the detailed disclosure required by the
Patent Office
• There are no time restrictions on trade secrets (in contrast to patents)

FORMS OF PROTECTION
Trademarks
• Intellectual property rights that allow
firms or others to differentiate their
products & services through the use of
unique “marks”
• Marks allow consumers to easily
Source: https://www.company360.in/blog/types-of-trademarks-you-need-for-your-
brand
identify the source & quality of

products/services

FORMS OF PROTECTION
Trademarks
• Most trademarks take the form of names, words, or graphic designs
• Trademarks also can be on the shape of packages, colors, odors, & sounds

• Trademarks are the most valuable form of intellectual property for many
firms
• A trademark should be suggestive of (but not describe) a product or
product line

FORMS OF PROTECTION
Copyrights
• Intellectual property rights to “writings” in
written and electronically-stored forms
• Protects the “form of expression of an idea”

and
not just words themselves
• Traditional way to establish a copyright is to

“publish” your book or other work accompanied Source: http://ipo.gov.tt/types-of-ip/copyright/
by a copyright notice using the word

“Copyright” or the symbol ©

OTHER METHODS
Confidential Disclosure Agreements

Documents used to protect an idea or other forms of intellectual property
when disclosure must be made to another individual or organization
Employment Contracts
It is an agreement between an employer and employee whereby the

employer employs the employee in exchange for the employee agreeing
to keep confidential information secret and to assign ideas and inventions
to the employer

Activity
Source: Frederick, H., Allan O’Connor, and Donald F. Kuratko (2016), Entrepreneurship Theory Process & Practice, 4th Asia-Pacific edition – Chapter 13

TYPES OF BUSINESS OWNERSHIPS AND LEGAL
12/03/2022 43
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12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 1

• Understand and discuss about the different types of legal

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 2

• Understand the relevance financial documents for first year of

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 3

Starting you own business:

operations as a totally new

Starting you own business:

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 5

Sometimes commercial goals

and ambitions are best

fulfilled by the acquisition of a Source: https://www.seekbusiness.com.au/business-resources/why-buying-a-business-is-better-than-starting-

firm that is already operating.

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 6

Purchasing an existing business :

place. •Chances of obsolete inventory

•Inventory in place and Trade credit is established face value.

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 7

A form of business organization in which

a firm that already has a successful

product or service (franchisor) licenses its

trademark and method of doing business

to another business or individual

(franchisee) in exchange for a franchise

fee and an ongoing royalty payment.

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 8

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 9

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 10

•It is much easier to start and dissolve the firm.

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 11

• Relatively cheap to setup and •Lack of continuity

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 12

When several people are in business

These people pool their resources,

as the liabilities of the venture.

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 13

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 14

Partnership Agreement. Further, it provides types of Partnership Firm as Unregistered

the Partnership firm is legal in the eyes of Law.

1. Unregistered Partnership Firm

2. Registered Partnership Firm

1. Unregistered Partnership Firm:

The Unregistered Partnership Firm is established by entering into

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 16

2. Registered Partnership Firm:

The Partnership Firm is to be registered with the Registrar of Firm (RoF)

The registration of Partnership firm involves payment of Government

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 17

The registration of partnership firm is preferable, as the unregistered

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 18

•A company is a separate legal entity, that has an

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 20

•High set-up and maintenance cost

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 21

1. One Person Company (OPC)

3. Private Limited Company (PLC)

4. Public Limited Company (PLC)

12/03/2022 TYPES OF BUSINESS OWNERSHIPS AND LEGAL ISSUES 22