Question

Describe the different types of Corporate Legal Structure and explain the similarities and differences in these, around: Individual, Mercantile Society and Corporations.

to. Entry criteria (what must be done to make it legal).

b. Limited Liability vs. Unlimited

c. Forms and Possibilities of Capitalization

Answer 1

One of the decisions that a business owner has to make is what type of organizational structure their business is going to use. There are four main types of business structures in the U.S: sole proprietorship, partnership, limited liability and corporation. Each structure has different tax, income and liability implications for businesses owners and their companies.

1. Sole proprietorship

Sole proprietorship is the simplest organizational structure available for businesses. According to the Internal Revenue Service (IRS), it is the most common form of business in the U.S. Businesses structured as a sole proprietorship allows the owner(s) to have total control over company operations. Businesses that typically form sole proprietorships are home-based businesses, shop or retail businesses and one-person consulting firms. Owners of sole proprietor businesses are responsible for their own record keeping and paying the IRS in the form of self-employment taxes. However, this type of business provides no protection for business owners, as they can be held personally responsible for their company's debt and financial obligations.

Corporations

The most complex organizational structure for businesses is the corporation. This type of business structure separates the liabilities and obligations incurred by company operations from being the responsibility of the owners. Corporations are regulated by the laws of the state they are set up in. Unlike sole proprietor and partnership businesses, corporations are taxed as separate entities at corporate tax rates. The IRS taxes corporation owners at individual tax rates. There are two common types of corporation structures: Subchapter C and S. The different between the two subchapters stem from different tax rules. Ordinary corporations are considered Subchapter C corporations. Subchapter S corporations, unlike Subchapter C companies, can pass income and losses onto their shareholders to avoid paying federal income taxes. This prevents double taxation of corporation profits.

b.

The difference between limited and unlimited liability is significant for business owners. Limited liability means you don't face much personal financial risk for debts of your business. Unlimited liability means you are exposed to potential losses based on company obligations.

c.

Capitalisation may be of 3 types. They are over capitalisation, under capitalisation and fair capitalisation.

Under capitalisation

Generally, under-capitalisation is regarded equivalent to the inadequacy of capital but it should be considered as the reverse of over-capitalisation i.e. it is a condition when the real value of the corporation is more than the book value.

Over capitalisation

Over-capitalisation has nothing to do with redundance of capital in an enterprise. On the other hand, there is a greater possibility that the over-capitalised concern will be short of capital.

Over-capitalisation affects the company, the shareholders and the society as a whole. The confidence of Investors in an over-capitalised company is injured on account of its reduced earning capacity and the market price of the shares which falls consequently. The credit-standing of a corporation is relatively poor.

An over-capitalised company tries to increase the prices and reduce the quality of products, and as a result such a company may liquidate. In that case the creditors and the Labourers will be affected. Thus it leads to the mis­application and wastage of the resources of society.

Fair capitalisation

Fair capitalisation is that situation where the business has employed the correct amount of capital and its earnings are same as the average rate of earnings.

The sources of funds and their amount should be carefully selected to attain the value maximization objective of a firm.