LEGAL STRUCTURE AND OWNERSHIP

KIRAN 051 RIDA 050

JAWWAD HUSSAIN 021 ALI AKBAR 022 SIDRA 100
 LEGAL STRUCTURE AND OWNERSHIP

1.0 LEGAL STRUCTURE

A legal structure (entity structure) is the legal definition of your business e.g., corporation,
partnership, sole proprietorship.

Choose a structure for your business. This structure will define your legal responsibilities, like:

 The paperwork you must fill in to get started

 The taxes you’ll have to manage and pay
 How you can personally take the profit your business makes your
 Personal responsibilities if your business makes a loss

You can change your business structure after you’ve started up if you find a new structure suits
you better.

1.1 THE RANGE (AND LIMIT) OF POSSIBILITIES

In most states, business owners may conduct business under many legal forms of organization,
though some forms, such as a professional corporation, may be permitted only for certain types
of businesses.

Some states may restrict the type of legal structure under which architecture firms may conduct
business. In some states, for example, architecture firms cannot operate as general business
corporations. Such restrictions may be intended to make architects’ professional liability as
transparent to the public as possible or to ensure that only licensed architects own and control
architecture firms.

Other states may rely on professional licensure acts to protect the public interest regarding
professional liability and oversight and may be less restrictive regarding the legal structure of
architecture firms.

1.2 LEGAL STRUCTURE AND PROFESSIONAL LIABILITY

As licensed professionals, architects are personally liable for their professional acts. They may
transfer some of the risk of professional liability to an insurer, but they may not transfer or
otherwise assign the liability itself to any other party, including a corporate entity. The legal
structure of an architecture firm cannot be counted upon to shield an architect from professional
liability. However, certain forms of legal structure—including corporations, professional

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corporations, or limited liability companies (LLCs)— may limit the personal exposure of an
architecture firm’s owners to other risks for which business entities are generally held
responsible, such as employment practices or general business liability. If the desire to
minimize personal risk is a principal factor in the selection of the legal structure for a firm, it
is advisable to consult legal counsel to determine whether the legal structure chosen will
provide the desired reduction in personal risk.

1.3 LEGAL STRUCTURE ACROSS STATE LINES

Generally, the state laws that regulate the legal structure of businesses apply to all businesses
operating in that state, including businesses lawfully organized in another state. Because
restrictions vary from state to state, the organizational structure of an architecture firm might
be legal in one state and illegal in another, even if the individual architects in the firm are
properly registered in both states.

The lack of a physical presence in a state generally does not relieve architects of their legal
obligations with respect to the legal structure of their firms. Any firm conducting business in
a state generally must comply with the laws of that state whether or not the firm maintains an
office there.
It is advisable for an architecture firm to consult legal counsel to determine whether the firm
is in compliance with the laws governing the legal structure of architecture firms in all states
in which the firm conducts business.

1.4 THE MENU OF OPTIONS

State-by-state restrictions notwithstanding, architecture firms are generally free to choose

from many legal forms of organization. The advantages and disadvantages of each should be
weighed to determine which form of organization is most suitable for a particular firm. The
legal structure generally is of greatest concern when a firm is initially formed, but it should
be re-examined as a firm grows and changes to ensure that it continues to suit and support the
firm’s strategic business objectives.

2.0 OWNERSHIP
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 Private Public
Owned by private people Owned by the Government /state

 Sole traders  NHS

 Partnerships  Hospitals

 Companies (Ltd and Plc)  Schools

 Franchises  The army

 Co-operations  The police

2.1 SOLE TRADERS

 Owned by one person.
 Small size businesses.
 Unlimited liability- this means that the owner is liable for all his debts which means
that their personal assets can be affected.
 The owner keeps all the profit.

Advantages
 You’re the boss = total control of
business management / operation
 Easy to establish
 You keep all the profits
 decisions about operating the business
 Low start-up costs
 Simple to operate
 No specific laws covering sole
proprietors - minimum legal
requirements (record-keeping and
reporting are required for taxation and
legal purposes).
 Maximum privacy
 Easy to change legal structure later if
desired.
 Easy to wind up / sell if desired without
requiring the consent of others.
2.2 SOME FACTS ABOUT SOLE TRADERS:
Disadvantages
 Unlimited liability for debts—no legal
distinction between private and
business assets
 Limited capacity to raise capital

 You need to make all of the day-today
 Retaining high-calibre employees can
be difficult
 Taking holidays can be difficult
 Life of the business is limited
 Taxed as a single person.
 Business development is limited to the
expertise and capabilities of the
owner.


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 In the eyes o the law the sole trader and the owner are one – you would sue the owner if
anything happened; e.g the hairdresser wrecked your hair. When the owner dies the
business cease to exist

 Banks often reluctant to lend money – usually the owner has to pay their own money or
borrow form family and friends

 The sole trader can keep all the profit once the expenses are paid; the accounts are keep
private.

 Opportunities to grow are limited as difficult to raise extra capital.

 SMALL SCALE operations and does depend on how ambitious the owner is.

2.3 EXAMPLES OF SOLE TRADERS:

 Examples include – plumbers, hairdressers, beauticians, market traders, Chinese

restaurants’, catering outlets etc.

 They o not need lager amount of money to set up.

2.4 PARTNERSHIP

It is an agreement between two, and up to 20 people, to carry on a business together for profit,
with the partners each contributing time, talent and money to the undertaking and sharing the
management responsibility. It must be a continuing, not a one-off venture. Partner’s hips may
trade under a business name or under the names of the partners. They are appropriate where
the number of persons involved is small and the degree of risk in the venture is such that limited
liability is not considered necessary.

2.4.1 TYPES OF PARTNERSHIPS:

1. General partnership
2. Limited partnership

GENERAL PARTNERSHIP

A partnership is any two or more individuals who contribute money, labor, and skill to a
business, and who share in its profits, losses, and management.

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LIMITED PARTNERSHIP

A limited partnership has one or more partners who have limited liability and no rights of
management.

2.5 WHAT IS THE LAW REGARDING PARTNERSHIPS?

The Partnership Act defines the rights and obligations of equal partners. The Act sets out the
rights and obligations of all parties. When there is a formal agreement, partners may decide
upon the distribution of capital and profits. If there is no such agreement then the law states
that all partners are equally entitled to share the capital and profits, and must also equally bear
responsibility for, and must contribute funds to meet, the losses and debts incurred.

Advantages Disadvantages
Two heads are better than one They have a life that lasts only as long
as the original partners agree to trade
together

Easy to establish Liability of the partners for the debts of

the business is unlimited

Low start-up costs Each partner is ‘jointly and severally’

More capital is available for injection
into the business
liable for the partnership’s debts, that
is, each partner is liable for their share
of the partnership debts as well as
being liable for all the debts
Risk of disagreements and friction
among partners and management

Greater borrowing capacity Each partner is an agent of the

partnership and is liable for actions by
other partners

High-calibre employees can be made Transfer of

partners ownership is complicated
and taking on a new partner requires
the consent of all parties

Opportunity for income splitting, an If partners join or leave, you will

advantage of particular importance due probably have to value all
to resultant tax savings the
partnership assets and this can be
costly

Privacy of partners’ business affairs Death and bankruptcy dissolves a

Partnership. If the venture is to
continue it must be re-formed

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 Limited external regulation

Easy to change legal structure later

A wider pool of expertise is available

and it is possible to divide the business
operation by specialist roles

Partners can decide on how the control

of the business and division of profits is
to be shared under formal agreements,
which can also provide for future or
unforeseeable difficulties

2.6 PARTNERSHIPS – FACTS

 In the eyes of the law all the partners are equally responsible for any debt
 Partners share the profits equally, unless different agreements have been made specify in
the Deed of Partnerships.
 They all liable to pay income tax on the profits.
 All the partners have unlimited liability for all the debt and the accounts are still kept private
 In a limited partnership – rare in the UK ; then the sleeping partner will have limited its
debt only to the capital invested into the business but the there partners will have to have
unlimited liability.
 Financing the business is easier and raising money for the business as there are more than
one owners in the business.

EXAMPLES INCLUDE:

Accountants, solicitors, doctors, dentists, veterinary surgeons estate agents etc..

HOW IS A PARTNERSHIP AGREEMENT REACHED?

Partnership agreements should ideally be put in writing to reflect the interests of all concerned,
and the nature of the business. It is possible to have a verbal or even an implied partnership
agreement but they can be problematic. A well thought out agreement will protect all partners
and will set out the rules of conduct for future events and how problems will be settled. It will
become the set of rules by which the business is to be conducted and should be agreed between
all partners before the business is started.

An agreement should set out:

• Names and addresses of the partners
•Nature of the business
•Duration of the Partnership
•Business name

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 •Business address
•Capital required for the business
•Capital contributions of each partner
•Distribution of net profits
•Provision for Partnership drawings (income)
•Authority of partners in making decisions or signing financial and legal documents
•The way in which the business is to be conducted and controlled
•A mediation process in case of disputes
•Procedures to be followed in the event of the:

O Bankruptcy, death or retirement of a partner

O Admission of a new partner
O Dissolution of the Partnership
O Sale or closure of the business

How do you chose a partner?

You should choose your intended partners very carefully before going into business. To make
a wise decision you will need to think about what the person can contribute in terms of capital
and expertise. Family and friends do not necessarily make the best partners if they cannot
contribute positively to the operation of the business.

2.7 WHAT DO YOU NEED TO KNOW BEFORE MAKING A PARTNERSHIP

DECISION?

All people considering entering into a Partnership must be made aware that:

 Partnerships and partners are viewed by law as the same thing as the
Business itself
 All partners are personally liable for business debts and any obligations and actions arising
from business dealings
 Undercharged bankrupts and persons of unsound mind cannot enter into a Partnership
 Unless otherwise provided for in the agreement
 Each partner may take part in the management of the business
 Each partner may enter into contracts with third parties
 No majority of partners may expel any other partner
 A partner cannot sell a personal share of the business unless other partners agree
 A partner cannot transfer ownership between partners or a third party without the agreement
of the other partners
 A new partner can only be brought in if all other partners agree
 A partner who retires from the business is still liable for debts incurred before the retirement
 New partners are not liable for debts incurred before they entered the business
 Death or bankruptcy of a partner will terminate the Partnership
 The Partnership has to be reformed or reconstituted if a partner resigns, dies or retires
 Partners may terminate the Partnership at any time by giving due notice of their intentions
 The life of the Partnership is limited to the duration of the association of the founding
partners.

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2.8 HOW IS TAXATION HANDLED IN A PARTNERSHIP?

A properly drawn up Partnership agreement can assist in establishing this claim. An application
for a Partnership Tax File Number is required and an annual taxation return must be filed. The
Partnership business is not taxed separately from the partners themselves. Each partner must
pay tax on all income, including the share of the Partnership profit. Partners cannot treat income
from the business as salary or wages. Partners may have the right to offset Partnership losses
against other income. Family members may benefit from a partnership by spreading the income
over two or more family members, to minimize the impact of taxation but remember all
members must be active partners in the business.

2.9 WHAT ABOUT CHILDREN IN FAMILY BUSINESS?

The ATO may view the inclusion of children under the age of eighteen in the family business
as an attempt at income splitting and may impose penalty rates on any income shared with
them. If your business is to include your children then you should seek the advice of an
accountant or business adviser to avoid unwanted taxation penalty situation.
There are also legal considerations regarding the capacity of children to enter into contracts in
their own right which are personally binding. If someone under the age of eighteen enters into
an ill considered contract then the results could become binding upon the partnership with no
personal liability imposed on the partner who is under 18. Third parties might also be unwilling
to enter into agreements with Partnerships that include children.

2.10 COMPANY
A proprietary company is set up under a formal legal agreement and gives the company a
separate identity (legal entity) from the people who own and manage the business. By law the
company is considered to be a person in its own right with the legal and financial obligations
that a person might have. It is owed a duty of care by the people who operate the business

THERE ARE TWO TYPES OF COMPANIES:

 LTD – Private Limited Companies

 PLC – Public Limited companies

WHO CAN FORM A COMPANY?

Companies can be formed by one or more people who must be over the age of 18. People who
are undischarged bankrupts or have been convicted of any offences relating to the formation,
management or fraudulent operation of any company, are barred from forming a company.
People who have committed any breaches of corporate law should see a legal advisor before
considering whether to form or enter into a company. There are serious penalties for ignoring
these rules.

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 Advantages Disadvantages
Your liability for the company’s debts is Formation of a company requires legal
limited (this protection is often and accounting advice.
destroyed by creditors, including
financiers, calling for guarantees from
directors).
The personal assets of shareholders are More complicated and expensive to
not threatened by company losses or establish and maintain.
debts except where shareholders are
guarantors for the performance of the
company
Ease of transferring ownership by Greater regulation by government under
selling shares to another party. the Corporations Act and through ASIC
e.g. requirements to provide annual and
other returns.
Shareholders (often family members) Public scrutiny of your financial affairs -
can be employed by the company. Prosecution and fines for failing to
comply with the Corporations Law.
A company is managed by appointed Scrutiny of directors’ activities by
directors, secretaries and managers – all ASIC.
of whom have set responsibilities.
Taxation rates are more favourable Costly to wind up.
(consult with your advisers as to
whether this provides an overall
benefit).
Access to a wider capital and skills base.
Transfer of company ownership may be
a simple process and the company does
not have to be wound up upon the
disability, death or retirement of anyone
of the persons involved.

WHAT ARE THE RESPONSIBILITIES OF COMPANY DIRECTORS?

The responsibilities are set down in law and it is common for company rules to give set duties
to specific individuals. Directors must ensure that all actions of the company are properly
recorded, hold an annual general meeting that includes the shareholders, and lodge various
forms with ASIC.

The directors may also exercise management functions in relation to day-to-day operations
such as:

 Buying or leasing trading premises.

 Arranging finance.
 Ordering goods and services.
 Paying suppliers.
 Operating service and retail outlets.

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 Keeping financial records.
 Preparing financial reports and tax returns.

WHAT CONDUCT IS EXPECTED OF A DIRECTOR?

The law sets down rules of ethical behaviour for directors and expects honesty and a duty of
care for the benefit of the company. Dishonest conduct covers more than theft or fraud. It may
be that any decision of a director which is not in the overall best interests of the company might
be considered dishonest under law. It is wise for directors to make sure that they are fully
informed of the possible effect of any decision made before they consent to it. In this way they
are protecting themselves and their company.

To do this effectively they should:

• Keep themselves informed of company activities.

• Take an active part in board meetings.

• Ask questions about management decisions.

• Look into any new proposals carefully.

• Seek outside professional advice in order to make considered judgements on any matter
before the board.

All information about the company and its dealings should be treated as highly confidential
and not used in any way which could damage the company. A director also has a responsibility
to ensure that the company does not incur further debts by trading when insolvent.

WHAT ARE THE SIGNS OF A COMPANY IN FINANCIAL TROUBLE?

If you are considering entering a company or are a director of one you should keep alert for the
danger signals.

These are:

• Low operating profits or cash flow.

• Problems in paying suppliers on time

• Suppliers refusing to extend further credit.

• Problems with loan repayments or keeping to over draft limits.

• Threats of legal action by suppliers and creditors to recover money owed.

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TRUST is formed when a business is transferred to a trustee to hold the assets, to run the
business, distribute income to beneficiaries and observe the provisions in the trust deed. Often
chosen where more than one family is involved in running the business.

Advantages
Limited liability is possible by
appointing a corporate trustee.
More privacy than a company
Flexibility in distributions among
beneficiaries.
Trust income is generally taxed in the
hands of individuals.
Disadvantages
More complex structure.
Expensive to establish and maintain
Problems can be encountered when
borrowing.
Powers of trustee are restricted by the
trust deed.

2.11 CO-OPERATIVES
A co-operative may be formed for the provision of goods or services to its members or for the
supply of goods or services to the general public. A cooperative is an entity voluntarily owned
and controlled by the people for whom it was established and who use its services.

THERE ARE TWO TYPES OF CO-OPERATIVES UNDER THE CO-OPERATIVES ACT 1997
(THE ACT):
1. Trading co-operatives— have a share capital and may distribute profits.
2. Non-trading co-operatives— do not distribute profits or surpluses to members. They may
or may not have share capital.

WHO CAN FORM A CO-OPERATIVE?

A co-operative is a body corporate. It can be formed by at least five people or two corporations
and is registered under the Act.

WHAT CAN A CO-OPERATIVE DO FOR ITS MEMBERS?

A registered co-operative’s functions are included in its rules as activities. Those activities
reflect the co-operative’s involvement in areas such as primary production, manufacturing,
trading, community or social activity.

TYPES OF CO-OPERATIVES
Co-operatives provide a wide range of social and economic activities, including:

• Agricultural

• Retailing

• Marketing

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• Transport

• Food

• Livestock/bloodstock

• Cultural.

WHAT ARE THE ADVANTAGES OF CO-OPERATION?

Services

The co-operative form of enterprise is specially suited for meeting the collective needs of
members, whether they are producers, consumers or workers.

Democratic control

Each member has an equal say in co-operative matters. That is, one member one vote.

Economies of scale

A co-operative can mean increased buying/selling power and reduced processing/handling

HOW DO CO-OPERATIVES DIFFER FROM OTHER BUSINESS STRUCTURES?

Generally, seven principles of co-operation apply to the operation and establishment of co-
operatives. These are:

1. Voluntary and Open Membership: open to all willing to accept the responsibilities of
membership.

2. Democratic Member Control: active co-operative members each have one vote.

3. Member Economic Participation: ensures that the operations of the cooperative are
focused on servicing the members’ needs. In a trading cooperative, surpluses are normally
distributed to members in proportion to business done with the co-operative.

4. Autonomy and Independence: co-operatives are autonomous, self-help organizations

controlled by their members.

5. Education, Training and Information: co-operatives provide education and training for
their members, elected representatives, managers, and employees so they can contribute
effectively to the development of their co-operative.

6. Co-operation between co-operatives: at a local, state, national and international level to

enhance the co-operative movement.

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7. Concern for Community: while focusing on member needs, co-operatives work for the
sustainable.

CORPORATION
Formed under state or federal law. Legally treated as an artificial person, distinct from the
individuals who own it.

TYPES OF CORPORATION

1. C CORPORATION

a. Legally separate from owners

b. Articles of incorporation
c. Annual filings and fees to state
d. Separate corporate bank
accounts and records
e.
f. Limited cash withdrawals
g. Federal, state and, in some
cases, local taxes
h. Tax id number
i. Income tax on profits

2. S CORPORATION

a. Subchapter s designation from its

chartered as corporation
b. Profits and losses pass through to shareholders personal tax returns
c. Losses limited to the shareholder’s tax basis
d. Shareholders paid wages, distributions
of profits or combination

ORGANIZATION OF CORPORATION

• Shareholders own the corporation through stock ownership.

• Shareholders elect the Board of Directors
• Board sets corporate policy.
• Board elects corporate officers who run the day-to-day operation.
CHARACTERISTICS

• The most complex form of business to set up and operate

• Profits may be subject to double taxation
• Limited legal liability
• Business continues after death of owner(s)
• Difficult and expensive to liquidate

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FORMATION OF CORPORATION

• Most Complex Form of Business to Set Up and Operate

• File Articles of Incorporation with the
• Secretary of State.
• Pay filing and license fees.
• Prepare and adopt bylaws.
• Obtain corporate minute book, corporate seal, stock certificates, and other desired
supplies.
• Follow corporate formalities.

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