Legal Structure of New Venture

Question 1

What is the definition of forms of companies and legal forms?

Answer 1

1.General partnership- Entity formed by two or more partners, individuals and/or legal persons, having unlimited and equal liability and sharing profits and losses of a business. A general partner’s liability is not limited to that partner’s percentage of ownership. Each general partner is jointly and severally liable for the debts and obligations of the partnership. Founders of company are usually management of the company, however there are the partners opting not to get involved in managerial decisions.

2. Limited partnership is a legal entity that is created under the laws of a particular jurisdiction, with one or more general partners and one or more limited partners. The limited partners are liable only to the extent of their Ownership interest in LP. The general partners are responsible for managing the partnership. The limited partners are, essentially passive investors. Provisions on general partnership apply, unless stipulated otherwise. Partners share profit and loss according to their shares in the company.
3. Limited liability company(LLC) represents a business entity created under the laws of a particular jurisdiction that combines corporate and noncorporate features. An LLC is owned by “members” and is run either by the members or by one or more “managers” (who may or may not be a member). An LLC is created by filing a document referred to as articles of organization (founding act). Members are free to organize their mutual relationship and their relationship with company at their own discretion, unless law stipulates otherwise.
4. Stock company (corporation) is a legal entity, created under the laws of a particular jurisdiction, separate and apart from its owners. Founded by one or more individuals/ legal entities, shareholders, with the core capital divided into shares (stocks). Shareholders are not liable for company’s obligations, except in the event of limited liability misuse. Stock company is fully liable for all of its obligations. Stock company may be public or private. Shareholders create founders act and statute of company. Statute regulates management and other issues pursuant to the law.

Question 2

What are the key advantages and disadvantages of different legal forms?

Answer 2

1.General partnership
Advantages:
Inexpensive to organize, several sources of capital, knowledge and resources, broader managerial base, advantages regarding various state taxes, property belongs to the
partners.
Disadvantages:
Unlimited liability of partners, divided authority, harder to source capital from external sources, since liability is divided among the partners, possible sources of destructive conflicts.

3. Limited liability company (LLC)
   Advantages:
   Liability up to the level of registered capital, business continuity, simple transfer of ownership, easy to collect capital, flexibility of management and representation, taxation privileges, possibilities to limit risk, etc.
   Disadvantages:
   Higher initial costs, prescribed minimum of capital, prominent regulation, complex procedure of company closing, etc.
4. Stock company(corporation)
   Advantages:
   Liability limit up to share level, professional management, easier to retrieve investment by selling shares/stock, continuous character investment by selling stocks since their operation is independent from individuals’ status, easy to increase capital through emission of shares/stock.
   Disadvantages:
   Harder to organize due to higher ownership and organizational complexity, slower in business actions, having that decision-making happens on various hierarchical levels in company, double taxation: profit and dividend.