Case study company_ forms_080212


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Company Forms. Key competence 7: Sense of initiative and entrepreneurship.

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Case study company_ forms_080212

  1. 1. Key Competence 7: Sense of initiative and entrepreneurship (The Netherlands)Title: Legal Forms of Business OwnershipSubtitle: Which legal form do I need for my start-up?ABSTRACTAlmost 90% of the European private firms are small or middle sized enterprises (SME’s). There arejust a few large companies which have hundreds or even thousands employees and very highrevenues. In contrast to SME’s, the daily life in a large company is significantly different and usuallyharder. But for all enterprises is due; who is in charge within the organization and how does acompany make money? On other words, how does the ownership of a firm affect its functionality andeffectiveness? These are questions dealing with the legal form of a business ownership in the privatesector.Learning Objectives At the end of this case study, you should be able to: Understand the different forms of business ownership and their complexity;- Understand the differences between these legal forms concerning ownership, management, legal duties, and other related subjects;- Distinguish the advantages and disadvantages of different forms of business ownership;- Understand the appropriateness of different business ownership’s forms;- Have learn a number of key terms, such as - holding company, venture capital, trusts, etc.;- Know the differences and similarities of business forms among the countries in the European Union;- Know what is the Societas Europaea (SE) and how to apply this concept.CONTENTAs start-up you have to decide which legal form of company you will have. In this case, you will startdescribing the forms of business ownership in the private sector, learning about their specificadvantages and disadvantages. Finally you can do an exercise where you must work out the legalforms of business ownership in your country. Therefore you can use the business ownership structureas used in this case. You also have to pay attention to the Societas Europaea (SE), the Europeanform of business ownership. 1
  2. 2. How to do?In Figure 1 you will see the forms of business ownership. Figure 1 – Forms of Business OwnershipTask 1Take a look at Figure 1, with the forms of business ownership in the private sector. After you studiedthe figure you must fill in the table below: Responsibility Legal Profits Form of Ownership Capability for the debts responsibilities and Business and Management to get of the losses ownership control money business Owner is full No legal Are responsible. responsibilities for the One No difference Hard to except for owner Sole traders Owner owner private and get a loan VAT duties business money Partnerships Co- operatives Private Limited Companies 2
  3. 3. Public Limited Companies (PLC)ConclusionOne of the first decisions you should make when you start an enterprise, is the choice of the legal formof your company. Which form you will select depends on several reasons, like how much startingcapital do you need and how much a private person or persons can invest.What are the legal consequences of each form, how many persons will start up a company etcetera?In short, there are a lot of factors to consider deciding the most appropriate legal form and this differsfrom situation to situation. In this case, we have distinguished 5 different forms of business ownership.. 3
  4. 4. AnswersTask 1 Capability Legal Profits and lossesForm Onderschip Management Responsibility to get responsibilities money Owner is full No legal Are for the owner responsible for Hard to get responsibilitiesSole traders One owner Owner except for VAT private and a loan business money. duties y yPartnerships Two or more Partners y yCo-operatives Two or more Partners y y y y Two or more y yPrivate Limited shareholders (by Employee n nCompanies name)Public Limited Many share olders y y Board n nCompanies (PLC) (anonymous)Note: Franchising is not a legal form itself. A franchise company often is more or less a member of achain of enterprises. The members of this franchise chain can have different forms of businessownership.ExampleAn overview of company forms in SwitzerlandThe most important business structures are: - sole proprietorship (D: Einzelfirma, F: raison individuelle) - limited company (D: GmbH, F: Sàrl) - stock corporation (D: AG, F: SA)Which business form is the best one for me?There is not one best solution, but different situations require different structures.Here is an overview indicating some key advantages of each structure:Sole proprietorship (D: Einzelfirma, F:raison individuelle)When you start a business alone and under your own name, it implies that your businessis a sole proprietorship.Advantages : - no lower requirement on equity - ease of formation - no legal formalities - low costs to create and operate - the net profit of the company is taxed as income of the ownerDisadvantages: - only 1 owner - unlimited personal liability (the business = the owner) - risk of personal bankruptcy - the name of the company has to include name of the owner 4
  5. 5. Limited company (D: GmbH, F: Sàrl)A limited company offers better protection (less liability) than a sole proprietorship or a partnership.It also implies a higher cost than a sole proprietorship. A minimum of 2 persons is required toincorporate a limited company. The company starts to exist when it is registered with the Registrar ofcompanies (D: Handelsregister,F: Registre du Commerce)Advantages: - A minimum investment commitment of CHF 20000.- is required (less than a corporation) - The founders liability is limited to the difference between CHF 20000.- and the lower amount that has already been invested by the founders.For example: If paid-up capital is CHF 15000 out of total capital of CHF 20000, then the partnersremaining open liability is only CHF 5000 - The company is a legal entity on its own - The company can relatively easily be transformed at a later stage into a limited company (SA) - Any name can be used for the company as long as it includes GmbH or Sàrl - Relatively simple legal formalities - No audit is required by lawDisadvantages: - Transfer of ownership is cumbersome - Upper limit of capital: CHF 2000000.- - Number of partners is limited by law - The net profit of the company is taxed independently of the income of the partnersStock corporation (D: AG, F: SA)A corporation offers the best protection and the easiest transfer of ownership but includes highcosts and strict legal formalities. A minimum of 3 persons is required to incorporate a stockcorporation.Advantages: - Personal liability is restricted to the capital investment or commitment - Shares can easily be transferred - Any available name can be used for the company (with or without AG or SA) - It is easier to find investors - The corporation is a legal entity (person) on its ownDisadvantages:- Minimum capital of CHF 100000- is required, 20% but at least CHF 50000- has to be paid cash - Double taxation: the company is taxed on its profits and the share holder are taxed when they receive a dividend - Higher costs to incorporate and operate the corporation - A yearly audit is requiredAssignments :As start-up you want to test yourself if you are capable to make the right choice. Now you are askedto do the six assignments below:Assignment 1While looking at the debt responsibility, a lot of people won’t choose being a sole trader (one personenterprise) or a partner in a partnership. Therefore start-ups often choose for a private limitedcompany. But they are forgetting that besides the money needed to set up a limited company, thislimited company also has a tax obligation itself. So, in fact, you pay taxes twice: paying for thecompany and yourself as an owner. Moreover, a lot of countries provide some tax advantages to soletraders and partnerships. So always be careful when you have to make this choice! 5
  6. 6. Please mention three reasons why you as start-up entrepreneur should select a limited company asthe legal form of your enterprise.Assignement 2Please mention at least 3 examples per form of business ownership. Copy and paste the logos andthe website addresses of these companies to an A4-paper.Assignemet 3Re-do assignment 1 and 2 for another country within the European Union.Tip: see linksAssignement 4Sample the assignments 1 till 3. Now you have an overview of a lot of countries within Europe.Compare the overviews and make a little report out of it. For instance, reporting the forms, thedifferences, what is remarkable, what are advantages from one country compared to the others, etc. Inreality, the issue of ownership is very complex. Large businesses tend to have multiple arms, and all ofthem could have a different form of ownership. Part of the business may be floated, leaving othersections as limited companies.Assignament 5Take articles from a current newspaper about business takeovers or similar that highlight anownership issue (there is generally plenty of such information available in the broadsheet businesssections or on the Web - just type in flotation, ‘takeover’ or merger into a search engine likeGoogle). Make a little report about it and explain the terms or words dealing with the ownership issuewhich were not mentioned before in this case study.Assignment 6Try to find out which company forms from other European countries are legal in your country.Compare those with the data you already found throughout the other assignments. What are the mainsimilarities and what are the differences?Gather again the information you found, because this gives you a nice overview of the situation withinEurope.WHAT NEXT??Links:Definition and type of SME’ s in European Union:  Forms in Sweden:  Forms in Germany:  of Business Ownership in USA:   documents/images/FormsofOwnership.pdfImage:Source: Try to get feedback, if possible, from peers, partners and a coach (chamber of commerce?) 6
  7. 7. 2. Try to answer the following questions: 2.1 What did you learn (give two examples)? 2.2 Will you be able to apply this knowledge in your profession? 2.3 How was your planning to do the tasks? 2.4 Could you compare your planning with your fellow students (if applicable)?3. Would you be so kind to provide us with some suggestions, so that we can upgrade this case studyif needed? 7