Corporate Governance
Generally, there are three major organizations in market economies, each with specific reasons, stakeholders, and a governing legal framework. They include:
Under for-profits or simply businesses, there are three business structures:
We concentrate on the for-profits in the subsequent discussions.
A business structure describes how a business is organized, influencing day-to-day operations. Five factors determine a business structure:
Considering the above factors, we now discuss the following business structures:
The limited partners earn a share profit that is usually lower than that of the general partners. Given their managerial position in the business, general partners earn more.
General Features of Limited Partnerships
A limited liability partnership (LLP) is a unique form of limited partnership existing in certain jurisdictions. An LLP does not have a general partner; it consists of only limited partners. All partners bear limited liability and share management responsibilities.
Commonly, one or more partners are voted in as managing partners. For example, in the USA, LLPs include law and accounting service firms.
A limited company is similar to a limited partnership, except that a limited company incorporates more features that facilitate more access to capital and skills that promote growth.
Limited companies are categorized into:
A private limited company is like a limited partnership. However, in a limited company, all owners bear limited liability, ownership can be easily transferred using shares, and owners and managers are separated.
The owners, called the shareholders, elect the board of directors to oversee the company and approve the distribution of profits to the owners. The board of directors, on the other hand, appoints various managers.
A private limited company goes by different names depending on the jurisdiction within which it operates. For instance, it is referred to as a limited company in the UK and a limited liability company (LLC) in the US. In the US, LLCs are legally restricted to a certain number of shareholders, and taxation is applied at the shareholder level only.
A public limited company (corporation) is similar to a private limited company, except that in many jurisdictions, there is no legal restriction on the number of owners or transfer of ownership.
General Features of a Corporation
Given its features, a corporation is the most appropriate form of company for a company that wishes to go public and have a substantial global organizational form in terms of revenues and asset values.
Question
Which of the following statements is most likely correct regarding business structures?
- Sole trader and general partnerships business structures both have a legal identity.
- The taxation regimes for sole traders and partnerships are different.
- Corporate bondholders and shareholders have different claims on a corporation in exchange for the capital they provide.
Solution
The correct answer is C.
Corporate bondholders and shareholders are the capital providers of a corporation. Corporate bondholders provide debt capital, while the shareholders provide equity capital. The bondholders provide debt capital in exchange for issued debt securities with no ownership entitlement. On the other hand, aside from returns, shareholders are entitled to the company’s ownership.
A is incorrect. Sole traders (sole proprietorships) and general partnerships do not have a legal identity. The business structures are considered an extension of the owner (sole proprietorship) or partnership agreement (general partnerships).
B is incorrect. The tax structures in both sole trader and partnerships are comparable because, in both business structures, profits are taxed as personal income.