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Business Structures

By Edited Aug 30, 2016 0 0

While different businesses exists all around the world, with increasing globalization there has been a trend towards certain commonalities in business structures. This infobarrel explores some of the more common and notable organisations although the exact mechanism would probably differ in your own country or even your state.

There are certain considerations to keep in mind too to obtain the most appropriate structure. Things like sole proprietorships will have much lower costs than companies, that would require audits and serious accounting. Even in a company issues such as privacy arises where a listed company would require a substantial amount of disclosure of confidential information. The ease of raising capital also varies greatly across the vehicles. The legal liability and process is also different across the structures. Usually however, one can change vehicles to suit changing times when there is a need to. A private company can become listed, then taken off the open market again.

Before exploring the concept of a company or a corporation which is likely the most familiar model to most people, it would probably be best to look at the most basic alternative or starting point of businesses.

One Man Show
That would be that of a sole proprietorship, an example would be your local mom & pop. It is likely to be close knit, with familial relations and something that is seen less and less if you happen to live in an urban area. It also happens to be one of the oldest business structures in existence as well as being pretty much the simplest vehicle. Costs of maintaining such a structure is low partly due to its informal nature, but the legal exposure is high. In many countries however they can exercise laxer accounting standards. It is also easier to enter into contracts but their legal liability can be infinite. Taxes are also in consideration business factors but this varies widely wherever you go.

They share a similar liability as that of a sole proprietorship, but for its partners there is an added agency element. Partnership is also a rather informal construct, and this can cause problems in countries where a finding has to be made about it. This is especially so in countries where partnerships do not have a separate legal personality as is usually a name, which would make one partner liable for the debts incurred by another. This liability would extend all the way to their personal assets, making it risky if a partner turned rogue and defrauds the others. To curtail this unfair outcome common law regions have in general required agency principles. While a partnership can come about informally or by express partnership contracts, for the partners to be bound by the act of another partner in common law scenarios usually would require some form of actual authority or ostensible authority. One reason why partnerships are a bad deal in common law countries, unless you happen to be in a mandatory profession like accounting generally or legal practise, is that even when a partner has no authority he may still be able to bind the firm to obligations and debts. Other tiny details can also come in to trip partners up.

Limited partnerships is a possible modifications that quite a few countries have as an address to the problems above. This is rather common in hedge funds, investment businesses and things like private capital or venture capital operations and is partly targeted at investors who have no intention to meddle with the daily affairs of the business. Limited partners are limited merely to the funds they have placed into the pool, but are not allowed to enter management. Should they go beyond just offering mere advice, and actually steer the wheel they may lose their limited liability protection. Different countries with different statutes regulates this to different extents. Take note that usually at least a partner bearing full liability is required, sometimes called a general partner. The laws in this area can be said to be rather new but generally bears similarity to partnership rules of thumb.

Limited Liability Partnership
Similar to limited partnerships this model tries to straddle the divide between the partnership and the company. Perhaps it could be said to be trying to create a more informal company that would be good for entrepreneurs and start ups in this new internet age where young teens are raving to go and start the next facebook or youtube. The LLP is usually distinct from the LP in that it is conferred a Salomon v Salomon style separate legal personality, the catch which is that LLP must appear in its name to signal such risk. Taxation rates would however differ from that of the company depending oon the applicable country laws. The redeeming factor would probably be to split the LLP from unauthorized acts of rogue partners, especially when the acts are with someone who is aware the partner has gone rogue.


In many countries companies are considered to be distinct entities. This means they can sue or be sued in their own name, but more importantly when a company goes bankrupt creditors cannot in general go after their owners.

This is another reason why you do not see many unlimited companies in existence in the world today. There are very few benefits, save secrecy of financial affairs as they may be exempt the high audit requirements of limited companies, which has been exploited for tax evasion purposes. There are still some legitimate uses of unlimited companies, like arms of GSK or Credit Suisse, but little are seen today.

Most companies these days are limited, which means when creditors sue to wind up the company their suits stop once the assets of the company depleted. (Subject to certain exceptions in most countries) This is the main benefit of incorporation that compels many business owners to go for incorporation over the other structures. Another helpful factor is that it can make it easier to raise capital through share issuance. If a company is listed on the country's stock market it is likely considered a public company, and is usually subject to more stringent requirements than private companies in that particular country. Change from one form to another is usually doable and has its own sets of pros and cons like privacy (in matters of audits or accounts which can include things like sample expense spreadsheet) or tax purposes.



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