Business Structure According to Law
Business Law – also known as Commercial Law is a specialized field of law that presides over any business and commercial transactions. Business law encompasses such business transactions and activities as creation and incorporation of companies; patents, trademarks, and copyrights; business guarantees and contracts; hiring and employment policies and rules; and corporate structure and composition among others. Generally, Business law is intended to ensure proper management of businesses for the benefit of all stakeholders, owners and the consuming public alike.
One of the basics of Business Law is intended to classify and provide ground rules on the proper business structure. There are a number of business structures; each differs in several essential aspects. These aspects vary differently among these business structures. Here are the most common aspects that may distinguish these business structures from the other – Taxation, Risk and Control, Liability, Continuity of Existence, Expense and Formality, and Transferability.
The two major aspects can be said to be Taxation and Liability. Traditionally there were tradeoffs between these two in a way that a company may risk having a bigger liability with low taxation or the other way around. However, some business forms like LLC’s and Corporations may have limited pass-through taxation and liability all at once.
Taxation may differ among these business structures. Many countries differ on this implementation, but generally there are many tax incentives and rules that may be available on a different degree among business forms. Taxation may include corporate taxes, and rules on how these taxes may be passed through consumers.
Liability, on the other hand, is a risk a business owner exposes oneself in doing business. Liability maybe understood as the legal accountability of the business and its owner to the effect and consequences of the business on the environment and the community.
Here are the most common legal business structures.
It is considered the simplest among business structures and is particularly prevalent among small scale businesses. The proprietor or the sole owner can only incur a little amount of expenses in setting the business.
It is generally the form referring to the association of two or more business people in creating a profitable business. This form is characterized mainly to having pass-through taxation. In General Partnership the owners are liable personally for the business and its incurred debts. In this form, the law specifically limits the ownership to at least two (2). This partnership need not be registered formally or in written formal documents.
This is a limited form of Partnership between two or more business people. In this set-up, the partnership can be classified into the General Partners – which are personally exposed in liability and involves in management of the business; and the Limited Partners – which does not participate directly in running the business but offers financial capital infusion and investment to the business thus without personal liability.
Limited Liability Partnership
This is a partnership derivative where-in all partners enjoy only limited liability. This form is prevalent in the legal and accounting profession. This structure is commonly used in Law and Accounting firms where individual professionals can act at their own personal capacity and is exposed to the inherent liability of their profession.
This form is commonly prevalent among the large business entities. It is characterized by the separation and distinction of the business entity from the owners. In the eyes of the law, Business Owners enjoy limited liability and may not be involved in running the business. A corporation may have their management structure that may consist of people aside from or completely different from the owners. Furthermore, a distinguishable fact and attribute of a corporation are its perpetual existence and easy share transferability. Also, depending on the local law of the country, there are laid rules and restriction for eligibility shareholders of the corporation.
Limited Liability Company (LLC)
This form is characterized by a limited liability of the owner of the business. In law, LLC can have at least one (1) member or owner. This structure is associated with a flow-through taxation which might be undesirable but generally better than a Corporation in terms of taxes and better income allocation flexibility.