Different Types of Corporations - Literature review Example

Running Header: Corporation law Student’s Name: Instructor’s Name: Course Name & Code: Date of Submission: Corporation law In venturing into any business, it is important to understand the various types of companies. This enables one to differentiate between the public and private companies which is significant in knowing their different features, aims and objectives and scope of their work. One is also able to analyse the various advantages and disadvantages of the options available. I would explain to Mr. Kong family that there are different types of corporations. Corporations are said to be legal entities that are created under the laws of state and act as separate legal entity with its own privileges and liabilities different from those of its members. Corporations are of different forms used in conducting business. According to Kraakman et al. (2004) corporations distinct features is that they have limited liability and this means that if the corporation fails, the shareholders stand to lose their investments and the employees lose their jobs though none of them is liable for the debts of the creditors. Corporations are therefore recognised as having their rights and responsibilities just like people. They also exercise human rights against individuals and state. Corporations are immortal but die when dissolved for example through order of court, statutory operation or voluntary action taken by its shareholders. Insolvency of the corporation results to a form of corporate death for example when creditors forces for liquidation and dissolution under a court order. The main characteristics of Business Corporation include having a legal; personality, having limited liability, transferable shares and the fact that management is centrally under a board structure. The most popular corporations used include C for corporation, S for corporation and non-profit corporation. C-corporation is commonly used as it is suitable for any kind of business. It has a number of shareholders and their assets are protected from their creditors. The liability of the shareholders is limited to the amount contributed by each as the capital of the corporation. This type of corporation has a disadvantage where there is double taxation as profits are first taxed then the income remaining is divided among shareholders and dividends. Companies having less than 75 shareholders are said to be S- corporations. These are not separately taxable entities as their income is given to their shareholders. S-corporation may also be connected to education or charity therefore establishing a non-profit corporation. In this case, the net profit of the corporation is not taxed if it is meant for corporate purposes. The other type of company that I would like Mr. Kong’s family to understand before making any decision is the sole proprietorship business. This is one of the simplest types of company. This type of business is owned and controlled by one person. The owner ensures that all the business functions are smoothly done and is also accountable for any profit of loss made by the business. The various features of the sole proprietorship type of business include that it does not need lot of money to start as capital, the dissolution procedure is simple as the owner makes their own decisions, there are also few taxes related to the type of business, in case of any liabilities, the proprietor is responsible. If the owner of the business dies, the business may be dissolved automatically. The owner has unlimited liability in that he is responsible for all losses and debts incurred by the business. According to Pamela et al. (2011) in UK for example the proprietors name must be displayed on business stationery as a requirement. The advantage of this kind of business is that there are reduced costs, easier to start and discontinue, easy managing. Unlike corporations which uses more costs on purchasing, accounting and other legal actions. The disadvantages of sole proprietorship are that it is difficult to raise capital and the unlimited liability where the personal properties of the owners may be taken incase of debts. The business also limits the breadth of management skills as fewer people are involved. The business may not attract skilled people as many employees seek stable employers. The other business that I would advise Mr. Kong to take up is Partnership Company. This is an organisation formed by two or more people known as partners. All the partners in this business are responsible for profit, loss or liability of the business. One important feature of this business is that partners enter into an agreement on profit sharing and loss bearing before the business begins. Pamela et al. (2011) shows other features include as in sole proprietorship, partnership businesses are simple and easy to venture. The taxation policy in this business is complex and that every partner is jointly and individually liable to the outcome of the business. The business may be dissolved when one partner is bankrupt, dies or once the partners have a mutual agreement. I would also advice Mr. Kong that getting into a partnership business, he should first understand the financial obligations and agreement between partners. This is because three are three different types of partnership which include general partnership, limited partnership and joint partnership. In general partnership, every partner enjoys equal ownership rights unless it s mentioned in the agreement. In limited partnership, not all partners are involved in the activities of the business but only one is responsible and in joint venture, the business join with another for a particular project then dissolved once the project is completed (Larry 1997). The other type of company is Limited Liability Company (LLC). This was formed as a result of business corporation and partnership types of companies. It provides greater flexibility as it has the advantages of both businesses. As in partnership businesses, LLC is simple according to the decisions made by the partners. Partners in LLC may get limited or unlimited liability according to the rules of the state. Tax obligations are the same as those of partnership business where every partner is liable. One feature of the company is that it is simple to form and very flexible. One important part in formation is the procedure of the agreement between members. An LCC is similar to a corporation due to limited liability and similar to partnership due to pass through income taxation. However, LLC is more complex than a corporation (Robert 1999). In explaining the difference between proprietary companies and public companies it is important for Mr. Kong to understand that corporations are classified by their size and according to corporation law. Lowry and Dignam (2006) describe that Corporation law is structured for large companies with a division between ownership and control with a capital from the investors. Proprietary companies have various features which include; they must be limited by shares or unlimited by a share capital. They also have no more than 50 non-employee members. Finally proprietary companies must not do anything requiring the issue of a prospectus. Once a company does not qualify to being a proprietary company, it is said to be a public company which must comply with all the regulatory requirements associated with corporation law. According to Bruce (2003) a proprietary company is a corporation in Australia and South Africa. It can either be limited or unlimited and depends on restrictions to carry out its activities. In Australia, the restrictions of a proprietary company are found in Section 45A (1) of corporation Act. These restrictions state that the company should have more than 50 shareholders and that it must not engage in fundraising that requires a prospectus. Large and small proprietary companies are distinguished by operating revenue, gross assets and the number of employees. A public company is one with a minimum of three directors. A public company is also run by the state often called state organisations. Their main objective are is serve the public and not necessarily to earn profits. Funds are given by the companies freely to develop the society and tare therefore involved in social welfare. Some of the public organizations include educational institutions, health services, national defence, financing etc. Public companies unlike proprietary companies they offer their securities for sale to the general public through stock exchange and market makers. The advantage is that they can raise capital though sale of securities (John and Adrian 2003). The table below shows the major differences between proprietary company and public company. Proprietary companies (no more than 50 non-employee shareholders) 1 – Limited by shares 2 – Unlimited with share capital Public companies (all non-proprietary companies: s9 definition of public company) 1 – Limited by shares 2 – Limited by guarantee 3 – Unlimited with share capital 4 – No liability company  Conclusion I would advice Mr. Kong that before incorporating into any business, it is necessary to understand the various features, advantages and disadvantages of the type of company. This is because in case he want to change his mind in future, it would be easier for him for example it would be advisable to take up a sole proprietorship business then he may change into a partnership business later in the future. This is because there is less documentation in moving to a partnership though when moving to a proprietary company to a public company, more legal restrictions have to be adhered to and many documents will be needed and Mr. Kong may not be in a position to change the business. Works cited Bruce, B. The history of the corporation, 2003. John, M. & Adrian, W. The Company: A short history of a Revolutionary Idea. New York: Modern Library. 2003. Kraakman, H et al.  Anatomy of Corporate Law: A Comparative and Functional Approach. New York: Oxford University Press. 2004.  Larry, E. A critique of the uniform Limited Liability Company Act, 25 Stetson Law Review 312, 1997. Lowry, J. & Dignam, A. Company Law. New York: Oxford University Press. 2006.  Pamela, H, Ian, R, & Geof, S. Commercial Applications of Company Law 2011. 12th ed. Robert, H. Limited Liability in historical perspective. Washington and Lee Law Review, spring, 1999. Read More