Basic legal structures for business organizations


A sole proprietorship is the easiest to set up a business organisation because there is no complex paperwork

A business entity is a commercial institution formed to engage in business activities, usually the sale of a product or a service. There are many types of business organisations defined in the legal systems of various countries. These include corporations, cooperatives, partnerships, sole traders, limited liability company and other specifically labelled types of entities.

The below article lists four basic types of legal structures associated with different forms of business:

Sole Proprietorship:
A sole proprietorship is the easiest to set up a business organisation because there is no complex paperwork. A sole proprietorship is an unincorporated business that is owned by one “individual”. Sole Proprietorship does not require government approval. The business has no existence apart from the owner. The owner is his or her own boss. He owns the business assets and is is personally responsible for all debts of the business. Thus, all liabilities of the business are the owner’s personal liability. The business ceases upon the death of the owner.

Partnership: A partnership firm is an association of two or more persons to carry on as co-owners a business or other undertaking for profit. A partnership is an entity different from its partners. A partnership firm is set up by a partnership deed which is a document made out by the partners and witnessed by a lawyer. The deed sets out the legal relationship between partners e.g. how profits will be shared out, responsibilities of partners etc. The property acquired by a partnership firm is property of partnership and not the partners individually. The partners are jointly liable for debts of the partnership. They are also jointly responsible for any legal liability against the partnership. Generally criminal liability of one partner will not be imputed to other partner(s)

Corporation or company: A corporation is an association of individuals, known as stockholders, created as a business entity. In order to form a corporation, a number of legal formalities have to be fulfilled. A corporation does not dissolve upon death of one or more owners. Companies are separate in law from the individual owners (shareholders) of the business. A company is a separate legal entity and bears its own name and seal. It can own property, incur debts and borrow money. Shareholders cannot be held accountable for the company's acts. The Companies Act, 1956, regulates a company's affairs and protects the interests of minority shareholders.

Limited Liability Company: A LLC is a flexible form of enterprise that blends elements of partnership and corporate structures. It is an association of individuals, known as members, that share characteristics of both the individual and corporate identities. It may be a sole proprietorship, a partnership or a corporation. Legal formality is similar to that of a company. LLC provides limited liability to its owners against the actions of the business or other members of business.



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