CORPORATE GOVERNANCE

CORPORATION as
distinguished from other
Business Entities

Submitted to: Submitted

by:
Dr. Kulwinder Singh Ankisha
Bansal
MBA (Sem
IV)
 INDEX
S. No. Topic Page no.
1 Corporation 1-3
Characteristics
Advantages
Disadvantages
Other Types of Business Entities
2 Sole Proprietorship 4
Advantages
Disadvantages
3 Partnership 5
Advantages
Disadvantages
4 Limited Liability Partnership 6
Advantages
Disadvantages
5 Difference: Sole Proprietorship and Corporation 7
6 Difference: Partnership and Corporation 8
7 Difference: LLP and Corporation 9
Corporation
A corporation is a legal entity, meaning it is a separate entity from its owners who are called
stockholders. A corporation is treated as a person with most of the rights and obligations of
a real person. A corporation is not allowed to hold public office or vote, but it does pay
income taxes. It may be established as a profit making or non-profit organization and may be
publicly or privately held. The stock of a public company is traded on a stock exchange.
There may be thousands, even millions, of stockholders in a public company. Stock of a
privately held company is not traded on an exchange and there are usually only a small
number of stockholders.
To be recognized as a corporation, a business must file an application that includes the
corporation's articles of incorporation (charter) with the State, pay an incorporation fee, and
be approved by the State. Once the approval is received, the corporation must develop its
bylaws. Organization costs, including legal fees, underwriters' fees for stock and bond issues,
and incorporation fees, are recorded as an intangible asset and amortized over a period of
time not to exceed 40 years.
Ownership in a corporation is represented by stock certificates, which is why the owners are
called stockholders. Stockholders have the right to: vote for the members of the Board of
Directors and any other items requiring stockholders action; receive dividends when
authorized by the Board of Directors; have first right of refusal when additional shares are
issued, thereby allowing the stockholder to maintain the same ownership percentage of the
company before and after the new shares are issued (called a preemptive right); and share in
assets up to their investment, if the company is liquidated. In some states, stockholders are
called shareholders.

Characteristics of a corporation
Unlimited life
As a corporation is owned by stockholders and managed by employees, the sale of stock,
death of a stockholder, or inability of an employee to function does not impact the continuous
life of the corporation. Its charter may limit the corporation's life although the corporation
may continue if the charter is extended.
Limited liability
The liability of stockholders is limited to the amount each has invested in the corporation.
Personal assets of stockholders are not available to creditors or lenders seeking payment of
amounts owed by the corporation. Creditors are limited to corporate assets for satisfaction of
their claims.
Separate legal entity
The corporation is considered a separate legal entity, conducting business in its own name.
Therefore, corporations may own property, enter into binding contracts, borrow money, sue
and be sued, and pay taxes. Stockholders are agents for the corporation only if they are also
employees or designated as agents.

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Relative ease of transferring ownership rights
Particularly in a public company, the stock can be easily transferred in part or total at the
discretion of the stockholder. The stockholder wishing to transfer (sell) stock does not require
the approval of the other stockholders to sell the stock. Privately held companies may have
some restrictions on the transfer of stock.
Professional management
Investors in a corporation need not actively manage the business, as most corporations hire
professional managers to operate the business. The investors vote on the Board of Directors
who are responsible for hiring management.
Ease of capital acquisition
A corporation can obtain capital by selling stock or bonds. This gives a corporation a larger
pool of resources because it is not limited to the resources of a small number of individuals.
The limited liability and ease of transferring ownership rights makes it easier for a
corporation to acquire capital by selling stock, and the size of the corporation allows it to
issue bonds based on its name.
Government regulations
The sale of stock results in government regulation to protect stockholders, the owners of the
corporation. State laws usually include the requirements for issuing stock and distributions to
stockholders. Publicly held companies with stock traded on exchanges are required to file
their financial statements and additional informative disclosures with the Securities and
Exchange Commission.

Advantages of Corporation
Limited liability. The shareholders of a corporation are only liable up to the amount of
their investments. The corporate entity shields them from any further liability.
Source of capital. A publicly-held corporation in particular can raise substantial amounts
by selling shares or issuing bonds.
Ownership transfers. It is not especially difficult for a shareholder to sell shares in a
corporation, though this is more difficult when the entity is privately-held.
Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass
through many generations of investors.

Disadvantages of Corporation
Double taxation. Depending on the type of corporation, it may pay taxes on its income,
after which shareholders pay taxes on any dividends received, so income can be taxed
twice.

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 Excessive tax filings. Depending on the type of corporation, the various types of income
and other taxes that must be paid can add up to a substantial amount of paperwork.
Independent management. If there are many investors having no clear majority interest,
the management team of a corporation can operate the business without any real oversight
from the owners.

Other types of Business Entities

Sole Proprietorship
Partnership
Limited Liability Partnership
Private Limited Company
Public Limited Company
One Person Company
Unlimited Company

A person wanting to set up a business has to consider what legal form organisation should
take.
Factors influencing this decision are:
How many owners the business is going to have?
What is the tax position of the business?
Can the owner take the risk of unlimited ability?
Does the owner want all the business profits?
Is there a complete privacy in the affairs of the business for the owner?
In the case of the owners illness or death what will happen to the business?

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Sole Proprietorship
The sole proprietorship is the simplest business form under which one can operate a business.
The sole proprietorship is not a legal entity. It simply refers to a person who owns the
business and is personally responsible for its debts. A sole proprietorship can operate under
the name of its owner or it can do business under a fictitious name. The fictitious name is
simply a trade name--it does not create a legal entity separate from the sole proprietor owner.

The sole proprietorship is a popular business form due to its simplicity, ease of setup, and
nominal cost. A sole proprietor need only register his or her name and secure local licenses,
and the sole proprietor is ready for business.

Advantages of Sole Proprietorship

Profits - they are kept by the owner. There are no other shareholders so the profits don't
have to be split.
Easy to run - every business is difficult to run successfully but sole trader is the easiest
form of business
Easy to establish - hardly any complicated forms or procedures. Some of the other legal
forms have to have legal forms completed before the business can start.
Total control - the owner is in charge of the business. He/she does not need to discuss
their decisions with any other owners. They have total control of the business.
Privacy - As there are no shareholders in the business you only need to inform Inland
Revenue and Customs and Excise in order for them to see how well the sole proprietor is
doing.
Flexibility - very flexible working hours as sole trader is its own boss e.g. Rather than
working on Friday he/she decides to work on Sunday instead.

Disadvantages of Sole Proprietorship

Illness - If ill the business might be forced to shut down stopping the income and profits

Unlimited liability - if the things dont work out as planned the sole proprietor could lose
all its investment.
Lack of continuity - because the owner is the business there is no guarantee that the
business will carry on running once the owner decided to stop.
Long hours - long hours may be required of the owner to keep the business afloat.
Difficulty in raising capital - small businesses find it hard to find a start up capital and
usually the owner might have to put his/her house as an insurance for capital borrowed.

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 Limited specialisation - as the owner has to be a purchaser, lorry driver and accountant
there is no time for this person to specialise in all fields

Partnership
A legal form of business operation between two or more individuals who share management
and profits. The federal government recognizes several types of partnerships. The two most
common are general and limited partnership.
If your business will be owned and operated by several individuals, you'll want to take a look
at structuring your business as a partnership. Partnerships come in two varieties:
general partnerships and limited partnerships. In a general partnership, the partners manage
the company and assume responsibility for the partnership's debts and other obligations. A
limited partnership has both general and limited partners. The general partners own and
operate the business and assume liability for the partnership, while the limited partners serve
as investors only; they have no control over the company and are not subject to the same
liabilities as the general partners.

Advantages of Partnership
easy to set up
profits belong to the partners
only tax authorities need to be told how much partners are earning and profit of the
business, so privacy is maintained
often good relations between partners
raising capital for the business is easier than that of sole proprietor
different expertise for partners e.g. 1 specialises in accountancy whilst the other in
marketing

Disadvantages of Partnership
Disagreements between partners, which can be bad for business

Some partnerships dont have a deed of partnership, which can lead to problems among
the partners later on
Most partnerships are relatively small businesses e.g. Shops, farms

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Limited Liability Partnership
A limited liability partnership (LLP) is a partnership in which some or all partners
(depending on the jurisdiction) have limited liabilities. It therefore exhibits elements
of partnerships and corporations In an LLP, one partner is not responsible or liable for another
partner's misconduct or negligence. In an LLP, some partners have a form of limited
liability similar to that of the shareholders of a corporation. In some countries, an LLP must
also have at least one thing called as a "general partner" with unlimited liability. Unlike
corporate shareholders, the partners have the right to manage the business directly. In
contrast, corporate shareholders have to elect a board of directors under the laws of various
state charters. The board organizes itself (also under the laws of the various state charters)
and hires corporate officers who then have as "corporate" individuals the legal responsibility
to manage the corporation in the corporation's best interest. A LLP also contains a different
level of tax liability from that of a corporation.

Advantages of LLP
Liability Protection: Each partner is personally responsible for the dealings of the
company including debts, liabilities and any wrongful acts of the other partners. The
liability protection that comes with a LLP is a big advantage.
Tax Advantages: The individuals in the partnership are liable for filing their personal
income taxes as well as self-employment taxes for the Internal Revenue Service. The
partnership is not held responsible for paying these taxes.
Flexibility: Partners have flexibility within business ownership under a limited liability
partnership. Each partner has the decision to say how they will contribute to the operations
of the business. Duties are either divided equally or based on the experience of the
individual.

Disadvantages of LLP
Special Tax Considerations: For tax purposes a LLP is recognized in some states as a non-
partnership. This could impact the partners who require special tax considerations.
Partners Not Consulting: The individual partners do not have to consult with each other
over certain business arrangements. Even though the general partners still have liability
over the business, they do not have to consult with the other partners, this can cause
dissention among the partners.
Death of a Partner: The limited liability partnerships are automatically dissolved upon the
death of a partner. Even if there are steps taken to ensure that the company will continue
beyond the demise of the partners, the LLP will not continue. The surviving partners can
opt to re-establish a LLP but this will need to be done after each partner dies.

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 Difference: Sole Proprietorship and Corporation

TYPE SOLE PROPRIETORSHIP CORPORATION

An individual doing his own A legal entity separate from is

Structure
business members
Must be formed in writing, through a
Formation No need to be formed in writing Memorandum and Articles of
Association.

Must be registered under the Must be registered with the SSM under
Registration
Registration of Business Act 1956 the Companies Act 1956

No maximum number, unless it is a

Membership There is only one person.
private company (50 members)

Managemen The sole proprietor owns and Company members are not its
t manages the business himself managers (directors) or agents

Limited in borrowing, only for the

Borrowing
Unrestricted borrowing powers purpose of its objective as stated in its
power
Memorandum of Association

Unlimited liability for the business Company members are not liable for
Liability debts the company's debts once they hold
fully paid company shares.

There must be a formal procedure,

Dissolution Can be dissolved informally winding up and liquidation, in
dissolving the company

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Difference: Partnership and Corporation

TYPE PARTNERSHIP FIRM CORPORATION

Governing Act Indian Partnership Act, 1932 Indian Companies Act, 1956

Partnership firm is created by The company is created by

How it is
mutual agreement between the incorporation under the Companies
created?
partners. Act.
Registration Voluntary Obligatory
Minimum Two in case of private company
number of Two and Seven in case of public
persons company.

Maximum 50 in case of a private company and

number of 100 partners a public company can have
persons unlimited number of members.

Management of
Partners itself. Directors
the concern
Liability Unlimited Limited

Contractual A partnership firm cannot enter into A company can sue and be sued in
capacity contracts in its own name its own name.

1 lakh in case of private company

Minimum
No such requirement and 5 lakhs in case of public
capital
company.

Use of word Must use the word 'limited' or

No such requirement.
limited 'private limited' as the case may be.

Legal formalities
in dissolution / No Yes
winding up
Separate legal
No Yes
entity

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 Difference: LLP and Corporation

LIMITED LIABILITY
TYPE CORPORATION
PARTNERSHIP
The Limited Liability
Companies Act, 1956 and
Governing Partnership Act, 2008 and
various Rules made
Law various Rules made
thereunder
thereunder
It is separate legal entity, It is separate legal entity,
Separate
separate from its member, separate from its partners\
Legal Entity
directors. designated partners.
It denotes the signature of
It denotes the signature of the
the Company and LLP
Common Company and every company
may have its own
Seal shall have its own common
common seal, if it decides
seal.
to have one.
Suffix Limited or Private Suffix LLP or Limited
Name Limited has to be added to Liability Partnership has
the name to be added to the name.
The name of the company can The name of the LLP can
Change of be changed with the prior be changed with the prior
name approval of Central approval of Central
Government. Government.
The LLP has ownership
The company has ownership
Ownership of assets and Partners
of assets and members only
of Assets only have capital
have shares in the company
contribution in the LLP
Liability of members is only Liability of partners is
Liability limited to the shares held by limited up to their capital
them. contribution
Minimum two for private
Minimum
Company and minimum
Number of Minimum two partners
seven for public company as
Members
per the Companies Act, 1956

Maximum 50 in case of
Maximum
Private Company and no cap No cap of maximum
number of
of maximum number of number of its partners
Members
Member in Public Company