Suppose that you plan to set up a business for yourself or you are contemplating investing your money in a business, you should know that, there are so many forms of businesses that will make a difference to your choices up front. Let us examine in here what are the different forms of businesses that usually exist and how they differ. The easiest way to set up a business is to register the business as a sole proprietorship owned by an individual whom we call the sole proprietor. Or a partnership can be formed by a group of individuals whom we call the partners. In both cases, the registration procedures are simple and usually require no more than finding a registration form and paying an annual fee to a government units, but in return sole proprietors and partners are held personally liable for all activities of the business. If for example, a business is closed down with outstanding loans, creditors can go after the sole proprietor or the partners for repayment of the loans. Likewise, if a professional service partnership is in breach of professional conduct, all the partners can become liable for losses of the client concerned. It is therefore more common for small businesses to be set up as sole proprietorship because the exposure to risk are less and the formation and compliance costs are lower. Also, some professional bodies require their members to practice only in form of partnership in order to ensure that they are held personally liable if they do not discharge the duties professionally. In most cases, prospective owners will form a business with themselves detached from it known as a limited liability company. This can be easily identified by seeing companies name ending with say Ltd in UK, LLC in US, GmbH in Germany and like this in Malaysia and so on. The notion of limited liability is founded on the principle that a company is regarded as a legal person. Where the company has the same capacity of engaging in activities and entering into contracts like any human individuals or so-called natural persons. As such, the consequences of deals made by a limited liability company will be the responsibility of the company itself not the owner's. Liability of the company will be settled using the companies as at where such liability can not be fully settled. The outstanding amount will become irrecoverable and creditors cannot go after companies owners for their money back. Therefore, the liability of the company is limited to its assets and in the event that the company is closed down the owners losses, will be restricted to the amount of investment they have put into the company and no more than that. While the owners financial interests can be protected by way of limited liability, the procedures for the formation or incorporation of a limited liability company are more onerous. In addition to that, limited liability companies have to comply with a set of legal requirements on a continuous basis. These are usually written into the campaign laws of different countries and failure to comply with these requirements, constitutes breach of law and result in penalties or even imprisonment. One of those requirements is to have limited liability companies keep their accounts and compile financial statements in accordance with established accounting standards. Such financial statements are also required to be externally revealed that is audited before they can be published to give a true and fair view of financial matters of the company. By demanding limited liability companies to publish their financial statements, the law aim to ensure that all parties dealing with the companies have access to timely and reliable information about the company. So, that they can make well informed decisions when dealing with them. Apart from the protection of owners, another important merit of limited liability company is its flexibility to allow a large number of owners to invest in the companies even if there are vast differences in the proportion of ownership. That is instead of having a feel ownness each with the same proportion of ownership there can be thousands of owners with vastly different proportions of ownership large or small. Furthermore, depending on its number of shareholders, a company may be setup as a public or private limited liability company. A public company is where the number of shareholders exceed a certain number say 50. Otherwise the company is classified as a Private Limited Liability Company. For a public company, transfer of shares does not require approval of the other shareholders. This is required in the case of private company. Further to this if a public limited liability company wishes to enlarge its shareholders pool by inviting the public to invest, the public company can go through an initial public offering and become a listed company with the shares traded on a stock exchange. Otherwise, a public company can remain as unlisted. All the above are rendered possible by the use of share as a denomination of ownership where the limited liability company is more precisely referred as company limited by shares. A share is one unit of ownership generally called an ordinary share. Owner holding ordinary shares are commonly called ordinary shareholder. For any ordinary shareholder, the proportion of ownership is conferred by his or her shareholding which is relative to the total number of shares issued to all the shareholders at a time. From ownership, a shareholder has a control. For example, holding five out of 500 issued ordinary shares is equivalent to holding one percent ownership of the limited liability company or holding one of 500 issued ordinary shares is equivalent to a 0.2 percent ownership. The control by shareholders is exercised by way of voting at general meetings of shareholders. When one ordinary share carries one voting right. Therefore holding one percent ownership should give an ordinary share holder one percent control of the company and holding 0.2 percent ownership gives a 0.2 percent control accordingly. By way of voting at general meetings decisions are normally carried by majority votes which may be a simple majority of more than 50 percent votes or a greater majority of more than 75 percent votes depending on the nature of the matter. Let us now turn to another example where Ben and John each hold one ordinary share of ABC limited and XYZ limited respectively. What is the percentage of control held by each of them? Ben should hold one percent control of one company and John 0.2 percent control of the other. It is always up to the company to decide the total number of shares to be issued to its shareholders. When taking up the shares, shareholders should then contribute investment money to the company which is recorded as share capital. The monetary value of each share, that is the face value is subject to the company's decision. For example, a shareholder subscribing 30 shares with face value of $10 each would undertake to contribute $300 to the share capital of the company. Once contributed, the share capital is recorded under the name of the company and the respective money can be used only by the company for the purpose of business operations. When the company makes profit in subsequent years, the share capital being the investment money contributed by the shareholders will remain unchanged. As for the profits earned, the company may decide to distribute the profit by way of paying dividends to shareholders otherwise, the shareholders do not have a natural right to share the company's profits and such will be retained in the company. In the unfortunate event that the company has been making losses, ultimately fails and owes money, the shareholders financial interests are similarly restricted to the share capital contributed by them and they are not required to make further contribution to make good the money owed by the company. This is unlike the situations of sole proprietorships or partnerships where the owners are personally liable for financial obligations of the businesses. Now at this point, you may be puzzling about the rationale behind allowing businesses to be set up as limited liability companies. We can understand the merits of such to the shareholders but how about the other parties that have involvement with the companies. These outside parties are generally referred as stakeholders which include suppliers, banks, employees, government, trade unions and maybe other regulatory bodies. This is where the laws come in. By putting up a series of legal provisions for monitoring the proper establishment and conduct of business operations by limited liability companies. Also, with the help of professionals like accountants, stakeholders can monitor more closely the limited liability companies they are dealing with. In this video, we have considered how different forms of businesses can serve different owners purposes in operations and define their personal liability. We also noted that for sole proprietor ships and partnerships where owners have to take full responsibility for their businesses, the legal requirement for formation and maintenance of businesses are less demanding. Whereas for limited liability companies where shareholders personal liabilities are limited, the incorporation and maintenance processes are more onerous with a greater burden of compliance. Therefore, the amount of owner's personal liabilities is inversely related to compliance requirements for their businesses. Why is this so? The spirit of the law is to strike a balance between allowing businesses to thrive in their suitable business models and protecting interests of different parties dealing with such businesses. In these processes, professional services from accountants are both mandatory and instrumental.
