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UNIT 6. Choosing a legal form of organization

New firm planners do some serious thinking about what legal form to choose for their new endeavour¹. This means determining what the status of the business will be in the eyes of the law. The choice has very important consequences².

Three legal forms (1. single proprietorship³, 2. partnership, 3. сorporation) are available⁴ to small firms. In all cases, all three choices should be looked at carefully. Some of the factors that should affect⁵ the decision include plans for expansion, product or service being sold, needs for raising⁶ capital now and in subsequent years, liability characteristics of the planned firm, the proprietor's available investment funds, need for continued life of the firm, alternatives for bringing desired people into the firm, and legal requirements of the particular locality.

The sole proprietorship is a business owned and ope­rated by one person. The owner and the business are synonymous in the eyes of the law. All assets in the firm are owned by the proprietor, subject⁷ only to the liabilities incurred in its establishment and opera­tion. The proprietor is solely responsible for all personal and business debts and any losses incurred, assumes⁸ all the firm's risks, provides⁹ most of its capital, and provides its total management. The only re­quirement for its establishment is that the owner obtain any licenses required by the city, state and start operations.

The proprietorship form has several advantages, such as: 1. Simplicity of organization, 2. Owner's freedom to make all decisions, 3. Owner's enjoyment of all profits, 4. Minimum legal restrictions, 5. Ease of discontinuance, 6. Tax advantages.

Disadvantages of the sole proprietorship: 1. Owner's possible lack of ability and experience, 2. Limited opportunity for employees, 3. Difficulty in raising capital, 4. Limited life of the firm, 5. Unlimited liability of proprietor.

The partnership is usually defined as an association of two or more persons to carry on as co-owners of a business for profit. Partnerships are based upon a partnership agreement, also known as Articles of Copartnership. Without a written agreement, the partner­ship does not really exist. Many circumstances arise which cannot be foreseen¹⁰ and therefore must be anticipated. It should cover all areas of possible disagreement among the partners. It should define the authority and the rights and duties of each partner, and the limits to such authority. It should include an agreement on how profits and losses are to be divided. Partners may make special arrangements¹¹ to pay members of the firm for services rendered, interest¹² on capital investment, time spent, or advance drawings¹³ before the balance of profits is to be divided in an agreed ratio.

Advantages of the partnership: 1. Ease of organization, 2. Com­bined talents, judgment, and skills, 3. Larger capital available to the firm, 4. Maximization of personal interest in the firm, 5. Definite legal status of the firm, 6. Tax advantages.

Disadvantages of the partnership: 1. Unlimited liability, 2. Limi­ted life, 3. Divided authority, 4. Danger of disagreement.

The corporation is an association of stockholders (part owners), formed with government consent¹⁴ and having the power to transact business in the same manner as if it were one person. A cor­poration has the same right as an individual to own property, conduct business, make contacts, sue¹⁵, and be sued. A corporation is a single entity¹⁶ (an individual person) in the eyes of the law.

Corporations are either closed or public. A small business corporation is usually a closed corporation. This means that capital stock¹⁷ is not sold to the public. If one of the stockholders decides to sell stock, it is usually sold to one of the other stockholders or to someone of whom they all approve. In this way, the ownership of the business is selective and controlled.

A public or open corporation offers its stock to the public. This means that its stock is available to anyone who wants to buy it. The principal owner of a public corporation is the majority stockholder.

Advantages of the corporation: 1. Limited liability, 2. Variety of skills, abilities, and ideas, 3. Easy transfer¹⁸ of ownership, 4. Ease of expansion, 5. Unlimited existence, 5. Applicability¹⁹ for both large and small firms.

Disadvantages of the corporation: 1. Government regulation, 2. Profit sharing²⁰, 3. Complexity and high cost, 4. Lack of freedom of action, 5. Taxes.

1) How many legal forms are available to small firms?

2) What factors affect the decision to choose legal form of the business?

3) What are the legal requirements for starting a business as a sole proprietorship?

4) What is the proprietor solely responsible for?

5) What is a partnership agreement? What should it include?

6) What is the corporation? What types of corporation exist?

7) Can you compare the legal forms of business for their advantages and disadvantages?

1) One advantage of the sole proprietorship form of business orga­nization is that

a. it is easy to raise capital

b. it has unlimited liability

c. there is limited life of the business

d. there is no sharing of profit

2) The legal form of business organization that has only one owner is known as

a. a sole proprietorship c. a cooperative

b. a partnership d. a stock company

3) One advantage of the corporate form of business organization is that

a. the number of government regulations is small

b. there is unlimited liability

c. there is easy transfer of ownership

d. taxes are low

4) One disadvantage of the corporate form of business ownership is that

a. it has limited liability

b. it has unlimited existence

c. it requires a sharing of responsibility

d. it must comply with a number of government regulations

5) A corporation that sells stock to the public is known as a

a. private corporation

b. government corporation

c. nonprofit corporation

d. public corporation

6) A law firm might easily be organized as a

a. partnership c. cooperative

b. sole proprietorship d. private corporation

7) Two partners operating a small amusement park with high-risk rides should consider changing their current partnership to a

a. sole proprietorship c. private corporation

b. limited partnership d. cooperative

8) If you have formed a small corporation, you can

a. sell stock to friends

b. list your stock with the New York Stock Exchange

c. borrow against your stock

d. none of these

9) The most common form of business organization for a small business is

a. the corporation c. the sole proprietorship

b. the cooperative d. the partnership

1) A payment of part of a sum due before receipt of the goods; to pay money before it is due.

2) The price paid for the use of money such as by a borrower to a lender of money; the money earned by a lender as a reward for allowing the borrower to use his money and for waiting for the repayment of the loan.

3) The entire shares of a joint-stock corporation (company), the holders of which together form the ownership of the concern.

4) Association of two or more persons carrying on business together for the purpose of making a profit.

5) The passing of a right of ownership from one person or organiza­tion to another, by an intentional act by a transferor as a sale or gift, or as a result of operation of law, such as bankruptcy or intestacy.

6) An arrangement between the owners of a business and its em­ployees by which an agreed share of the profit is paid to each employee over and above his wages or salary.

7) The one and the only owner of a business. He provides all the capital, bears all the risk, and in return receives all the profits. Such a concern is called a one-man business, although the pro­prietor may employ a number of people.

8) An attempt to do a particular thing, especially something new or original.

9) A complete, separate thing that is not divided and that is not part of anything else.

10) You start a legal case against someone, usually to claim money from them because they have harmed you in some way.

4. Supply the sentences with the missing words.

apply, affect, foresee, consequences, subject, assume, consent, available, provide, arrangement

1) The economic ... of the computer revolution are unforeseeable.

2) More information becomes ... through the use of computers.

3) I made a mistake and I will ... responsibility for it.

4) He made an ... to rent the property.

5) We intend to ... economic sanctions.

6) There was a basis for ... between the two parties.

7) Computers can ... our lives in different ways.

8) The government cannot ... all young people with a job.

9) Your gift will be ... to tax.

10) Do you ... any problems with the new system?

5. Complete each sentence with the correct form of take and a word from the list below. Use each word once only.

call	down	on	seriously
chair	further	Out	steps
charge	home	Over	up
consideration	off	Risk

2) We had to ... ... extra staff during the holiday season.

3) When all the transport costs have been ... ... into ... ..., we have in fact made a loss.

4) Sales really ... ... after the product had been mentioned on televi­sion.

5) A good sales rep can ... ... over £500 a week.

6) If my phone rings, could you ... ... the ... ... for me?

7) We must ... ... to see that we don't lose our market share as a result of this increased competition.

8) If the boss is ill, who'll ... ... the ... ... at the meeting?

9) He didn't seem to … ... the threat of redundancy very ... ... .

10) Don't ... ... this ... ... Angela. I'm just thinking aloud.

11) In 1988 we were ... ... by a large multi-national company.

12) If the account is not settled within seven days, we shall be obliged to ... ... the matter ... ... .

13) Mrs Jenkins has been appointed to ... ... of our Canterbury branch.

14) I'm not sure if there is a market for this kind of product but you don't get anywhere without ... ... a ... ... now and again.

15) They decided not to ... ... the option, so we had to look around for other potential purchasers.

Notice once again how important word partnerships are. Write down all the expressions using take and other words.

GRAMMAR FOCUS

6. Complete each of the sentences by using the past form of one of the verbs on the left and combining it with one of the words on the right. Use each verb once only. Some words on the right are used more than once.

break	shut	back	off
build	take	down	on
go	hear	up	out
sell	ring	from

2) The racking equipment ... ... and production was halted for an hour.

3) The new range was so popular that the shop ... ... in 2 days.

4) Last year they ... ... the factory for three weeks and everybody had to have their holiday at the same time.

5) She ... ... working even though the others had stopped.

6) I ... ... immediately saying I was interested in their offer.

7) My plane ... ... four hours late because of fog.

8) I finally ... ... our agent in Turkey. He phoned last week.

confid…nt	effici…nt	perman…nt	relev…nt
conveni…nt	insolv…nt	redund…nt	signific…nt

1) I'm ... that we'll reach our target without any difficulty.

2) You should be familiar with the regulations ... to your work.

3) We must process these orders in a more ... way.

4) Unfortunately, the accounts show the company is ... .

5) Short-term measures aren't enough. We need a more ... solution.

6) The advertising campaign had a ... effect on their sales.

7) 100 workers were made ... when the factory closed.

8) You couldn't get a more ... location than next to the station.

DISCUSSION

1. Can lack of ability and experience in small firm owners be corrected solely by their adopting another legal form of organization for the business?

2. Evaluate "ease of discontinuance" as an advantage of the pro­prietorship form of legal organization.

3. Is the owner of a small corporation as "free to make all deci­sions" as a single proprietor? Explain.

1. Write a summary of the text.