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Types of Companies
There are many different types of business associations that exist around the world in order to suit different needs. Different countries allow various types of business associations to be formed, each requiring different documents for formation. Some of the main considerations when choosing which business form to use are: (i) the types of products or services; (ii) tax issues; (iii) control and management objectives; (iv) liability risks; (v) business risks; (vi) financial, growth and investment goals; (vii) owner and employee compensation and benefit goals; and (viii) scope of the intended geographic market for products and services. This section will summarize briefly the main types of business associations that exist, as well as their formation documents and other requirements.
(a) Sole Proprietorship
A sole proprietorship exists when one person (the “sole proprietor”) carries
on a business without forming a separate company. That person is the sole
owner of the business. The sole proprietor may employ others as employees
but such employees are not otherwise involved in the management of the business.
All of the income, losses, assets and liabilities of the business are also
those of the sole proprietor (i.e., the person is not a separate legal entity
from the business). The sole proprietor may, however, limit personal liability
by purchasing insurance. There are obviously few legal formalities in forming
or operating a sole proprietorship and thus many small businesses choose
to be so organised.
(b) Partnership
A partnership exists when two or more persons (called “partners”)
carry on a business together with a view to profit. These persons can be
either individuals or corporations (corporations are viewed as “legal
persons” under the law). Partnerships are generally preferable to corporations
from a tax standpoint in that they are said to have “pass-through” or “flow-through” taxation.
In other words, the profits of the partnership pass through the entity to
the partners themselves. As a result, partnerships are only taxed once via
the partners´ income tax (unlike a corporation which is subject to
double taxation of corporate profits and shareholders´ income).
Partnerships are a common form of business organisation, used often by
lawyers and chartered accountants, but also by small businesses and large
commercial
projects. Normally, partners will have a kind of partnership agreement
(which is a contract between the partners, often called “Articles of Partnership”),
which lays out certain aspects of the partnership, such as who the partners
are, when the partnership commences, its planned duration or how it is
to be managed (a sample partnership agreement is included at appendix ?).
The corporate law of many countries often permits different forms of partnerships.
A “general partnership” is one in which the liability of each
partner for the debts and other obligations of the partnership is unlimited,
which means that all partners can be held responsible for re-payment of all
of the partnership’s debts. On the other hand, in a “limited
partnership” (or “LP”), the liability of “general
partners” is unlimited, but the liability of “limited partners” is
restricted to the amount that the limited partner contributed or agreed
to contribute to the partnership. In exchange for this limited liability,
a
limited partner is often required to be a passive investor rather than
an active participant in the operation of the limited partnership.
A common business form for law firms in the US, the UK, Japan and Canada
is the “limited liability partnership” or “LLP”.
In this form, all partners have a limited liability (rather than just the
limited partners like in the limited partnership) regardless of whether
they manage the business directly. A LLP is often appropriate when all
partners
wish to take an active role in management of the business. This business
form, however, is generally only available for law firms, accounting firms
and other professional organizations.
(c) Companies/Corporations
A company or corporation is the business entity most often used when carrying
on business activities. The word “company” is often preferred
in the UK whereas the word “corporation” is generally used
in the US.
A company is a separate legal entity from its owners. Some of the consequences
of this are that it can sue and be sued and is taxed in its own name.
The owners of a company are its “shareholders”. These are people
who provide the company with money, property or services, which then belong
to the company. A company may own property, carry on business, possess rights
and incur liabilities in its own name while the shareholders own the company
through the ownership of “shares” or “stock” in
the company.
Although shareholders are described as the company’s “owners”,
they do not personally own the business or the property of the company. Likewise,
the rights and liabilities of the company are separate from those of the
shareholders. Shareholders thus have “limited liability” since
their liability is restricted to the value of their shares, and they can
never lose more than the amount they paid for their shares even if the company
should end up with liabilities in excess of its assets. A company thus allows “owners” to
invest in a business without exposing their other assets, including personal
assets, to the creditors of the business.
Other important participants in a company are the directors and officers.
Directors are primarily charged with the responsibility of managing the
business. They often sit together as a “board” and are referred to as the “board
of directors” of a company. They are usually elected by the shareholders
at the annual meeting of the shareholders called the “annual general
meeting” or “AGM” or the “annual meeting”.
The directors usually then choose “officers” who are responsible
for the day-to-day management of the business.
Another characteristic of a company is that it has perpetual existence.
The assets and the structure of the company last beyond the lifetime
or withdrawal
of an owner/shareholder. In order for a company to be “dissolved”,
a majority of shareholders must resolve that it should be, a court must
order it, or the relevant government official may dissolve the company
if the company
is in breach of applicable legislation or it has been inactive.
Types of Companies
United Kingdom
In the UK, there are two main types of companies – limited and unlimited companies. Registration for all companies must be done through the Companies House. Unlimited companies are those in which, naturally, liability is unlimited. This means that its shareholders are responsible for paying the full amount of what the company owes should the company go bankrupt. Limited companies are those in which the responsibility of shareholders is restricted in some way (depending on the type of limited company).
There are three types of limited companies:
(i) Public limited company (“plc”) – the shares of the company may be offered
for sale to the general public. Liability is limited to the amount unpaid on
shares held by shareholders. There is a minimum amount of share capital which
must be issued in order to establish this kind of company (presently £50,000).
Many of the large multinational companies are incorporated as PLCs in the UK,
such as Cadbury Schweppes plc, Rolls-Royce plc, Tesco plc, Unilever plc, Vodafone
Group plc, and British Airways plc.
(ii) Private company limited by shares (“Ltd”, “Ltd.”, “Limited”, “Incorporated” or “inc.”) – liability
is limited to the capital invested, in other words, the sale of shares. Unlike
in a public limited company, shares may not, however, be offered to the general
public and therefore cannot be traded on a public exchange. There is a maximum
and minimum number of people that can hold shares (presently in the UK, the maximum
is 50 and the minimum is two). Most UK companies, especially smaller ones, are
private companies limited by shares.
(iii) Private company limited by guarantee – no shares are issued but the company
is instead guaranteed by its “members” who agree to pay a fixed amount in case
of liquidation/bankruptcy. Charities and political parties often use this kind
of company. For all of these types of companies, one must send a memorandum of
association, articles of association and two other forms, together with registration
fees to the Companies House in order to register the company.
United States
In the US, several forms of corporations exist since each state has jurisdiction over the formation, management, operation and termination of corporations. Many of the states follow the same general format for company law as found in the Model Business Corporation Act, which was originally developed by the American Bar Association (ABA). It is not law, but rather it simply provides guidance for State governments to develop their corporate laws. However many companies are formed in the state of Delaware (about half of Fortune 500 companies), which does not follow the Model Business Corporation Act. Law students therefore generally study both models of companies in law school and some other states (such as New York, California, Texas, Illinois) combine both of these two model laws.
There are generally two types of corporations in the US. The “C Corporation” is one which files its own tax returns and pays its own taxes, rather than passing this liability onto its owners. An “S Corporation”, on the other hand, is taxed like a partnership and the profits and losses of such a corporation flow through to its owners in proportion to their stock ownership. Stockholders are still protected from the liabilities of the business, however, in an S Corporation. The S Corporation is often preferred by small businesses, especially when stockholders are often also employees of the corporation or are otherwise involved in the day-to-day operations of the corporation.
Many companies choose to incorporate in the state of Delaware for many reasons, including its sophisticated and flexible corporate law and their separate commercial law courts with judges who are knowledgeable and experienced in corporate law matters. A company does not have to have its headquarters in Delaware, but it must have at least a registered agent there.
Loosely equivalent to the UK’s limited liability company, another business form in the US is the “limited liability company” or “LLC” which differs from both a corporation and a partnership in its formation, management and tax responsibilities (note: the correct term is limited liability company and not limited liability corporation). One may wish to form an LLC because it combines the limited liability features of the corporation with the tax efficiencies of a partnership. Some of the small differences in company formation include that while shareholders own a corporation, “members” own a LLC. Members establish a general operating agreement which empowers managers to manage the affairs of the business. Ownership percentages, profit and loss distribution and voting rights are determined by the “Articles of Organization” rather than by stock ownership. In addition, LLCs are treated as partnerships for tax purposes and there is also no requirement for directors or officers.
Full text may be found at http://www.abanet.org/buslaw/library/onlinepublications/mbca2002.pdf
(last visited 2006-11-23).
European Union
The EU has developed a new form of European company called the “Societas Europaea” or “SE”. This is a public limited company which may be created through registration in any one of the member states of the European Economic Area. An SE is to be treated as if it is a public limited company according to the law of the member state in which it has its registered office. The reasoning behind the development of a SE is to allow companies incorporated in different member states to merge or join together in some other manner while avoiding the legal and practical constraints arising from compliance with all of the different laws of the different member states in which they are doing business. For tax purposes, an SE company is treated like any other multinational company according to the law of the member state in which it has its registered office.
Company Documents
A company usually requires founding documents (which one can liken to a “constitution”)
which defines the existence of the company and regulates the structure and control
of the company. Sometimes, this is composed of two documents. The first specifies
the company’s objects and powers and its authorized share capital. In the US,
this is called the charter (or the “articles of incorporation”) and in the UK,
this is called the “memorandum of association”. The second document outlines
the company rules for internal affairs and management, such as procedures for
board meetings and annual shareholder meetings. In the US, this is called the “bylaws” and
in the UK, this is called the “articles of association”.
Companies will often have “shareholder agreements” which normally do not have
to be made publicly available. There are different types of shareholder agreements
but they are all contracts either between shareholders or between shareholders
and the company. One common one is the “unanimous shareholder agreement (“USA”)
in which all shareholders of a company agree on certain ways of exercising their
rights and agree to the management of the business of the company by the directors
and officers. All the shareholders of a company must sign the USA for it to be
valid, however a valid one may, in some jurisdictions, supersede the company’s
articles of incorporation/memorandum of association.
Law in practice
Lawyers working with “company”, “business” or “corporate” law obviously have an extremely wide variety of tasks. These are expanded upon in the other LETS sections on company law.
In a smaller law firm, company lawyers may be involved in assisting people start up businesses. This involves advising on which type of business association is most appropriate and drafting the company constitutional documents. There are normally various restrictions on company names as well and the company lawyer may assist in conducting name searches to ensure that the client’s desired company name would not be rejected by the authorities. The lawyer also assists in registering the company and ensures that all company laws are abided by, for example rules on directors, authorised share capital and registered address.
In larger law firms, law clerks or paralegals often perform this duty. In addition, in many countries, “shelf companies/corporations” are created. These are companies that have no real business but are put on the “shelf” for later use. This shelf company is then later sold to someone who wishes to start up a company in order to save time, to establish an older company (some jurisdictions have laws on how old a company must be in order for them to be able to enter into contracts), and for potential easier access to investment credit (because it is an older company). Therefore a lawyer who is assisting with starting up a new company will often simply buy a shelf company and transform this into their desired business entity.
After the company is established and registered, then the company lawyer will assist in any matters which may require a lawyer, such as drafting of any company contracts or agreements, assisting in any litigation which may arise involving the company, assisting in any employment law matters, advising regarding any contemplated business transactions with respect to the legal implications or requirements, etc such as the merger of two companies or the acquisition of another company.
Lawyers working in-house for a company also assist in these tasks. Often a company which has in-house lawyers will rely first on the in-house lawyer for many tasks, unless they are too large or specialized for the legal department to deal with alone – in that case, they will seek the assistance of law firms. In-house counsel is also often involved in the running of the business, including sitting as a member of the board of directors. Smaller and medium-sized companies usually do not employ in-house lawyers and will only require the assistance of a law firm should any legal matters arise.
These appendices are in Adobe Acrobat format.
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Appendix
1 (Appendix 1 Articles of Incorporation)
Appendix
2 (Appendix 2 Bylaws)
Appendix
3 (Appendix 1 Shareholders’ Agreement)
Appendix
4 (Appendix 2 Partnership Agreement)
Lesson Plans
Lesson
plan 1 (Sample lesson plan for Chapter 2 of the International Legal
English Course book)
Lesson
plan 2 (Sample lesson plan for Chapter 2 of the International Legal
English Course book)