LEGAL FORM OF BUSINESS ORGANIZATION

By: SENATHON IPIA




 


Meaning of Business
Business is providing goods and services in exchange for money.


Meaning of Business Organization
A business organization is an establishment (or an entity or a firm) that provides goods or services or both to make profit.
Profit making is the original purpose of business. Profit is made when money from selling goods/ services is more than money spent to provide the goods/services.

Money from selling goods/services is referred to as revenue or income. Money spent to provide goods/services is referred to as cost. Cost is divided into expenditure and expense.

Expenditure is cost incurred for which the benefit is long-term. Expense is cost incurred for which the benefit is used up immediately or within a short period.

In Economics, another name for business organization is firm. In Accounting, another name for business organization is Business Entity. And in Law, a business organization is either a legal entity or not a legal entity.


‘Legal Entity’ or ‘Not a Legal Entity’
First, a legal entity is an adult person, also known as natural person. Now, the law states that an adult person can:
1. enter into contract in his/her own name.
2. sue and be sued.

Similarly, the law creates some business organizations as legal entities – they are regarded as persons – but artificial persons, since they are not humans. As “artificial persons”, such business organizations can:
i. enter into contract in their own name.
ii. sue and be sued.

Note: 1. A Contract is an agreement for business transaction, which the law can enforce. That is, the law court can order that the business transaction be carried out.

2. To sue and be sued means you can take another natural or artificial person to a law court, and you too can be taken to a law court by a natural or artificial person.

In summary, a legal entity is one that can enter into contract and sue and be sued in his/her/its own name. It could be a natural person or artificial person.  (Note: The pronoun ' its ' is used here to mean a business organisation).

Again, remember: a natural person = a human being; artificial person = a business organization that the law recognizes as a legal entity.


‘Separate Legal Entity’ or 'Not a Separate Legal Entity'
If business organization is a legal entity, it follows that it is a separate legal entity from its owner(s).

But if a business organization is NOT a legal entity, it follows that it is NOT a separate legal entity from its owner(s).

In law, it is a legal entity that can own a business organization. That is why a business organization that is a legal entity can own another business entity. If a legal entity owns another legal entity, then they are separate legal entities.

Businesses organizations that the law recognizes as legal entities, meaning such businesses are separate legal entities from their owners, are:

1. Private Limited Liability Company (or simply Private company)
2. Public Limited Liability Company (or simply Public company)
3. Limited Liability Partnership (LLP)
4. Public Enterprise (or Public Corporation)
5. A Co-operative Society that is registered as a limited liability

These business organizations can enter into contract in their own name, and can sue and be sued, too, in their own name.

Note: A co-operative is a business owned by members of an association.

On the contrary, business organizations that the law does NOT recognize as legal entities, meaning the businesses are NOT separate legal entities from their owners, are:
1. Sole Proprietorship (or Private Enterprise).

2. (a) General partnership, also known as ordinary partnership
    (b) Limited Partnership

3. A Co-operative Society that is not registered as a limited liability.

These business organizations CANNOT enter into contract in their own name, and CANNOT sue and be sued, too, in their own name.

Meaning of ‘Body Corporate’
“Body Corporate” is another term for separate legal entity. And a business that is a body corporate is said to have a corporate status.

Meaning of ‘Legal Form of Business Organization’
Legal form of business organization (or simply Form of business organization) refers to the number of owners or the kind of owners of the business organization and whether the business is a legal entity or NOT 

That is, what make one business organization have a different legal form from another are:
1. the number of owners or the kind of owners of the business organization, and
2. whether the business is a legal entity or NOT (i.e. limited liability or unlimited liability).

These two conditions are what the law guiding the establishment and registration of business organizations considers, to make one business organization have different legal form from another.

Note: 1. Corporate Affairs Commission (CAC) is the name of the government agency authorized to register business organizations to give them legal recognition.

2. Companies and Allied Matters Act (CAMA) is the law guiding the establishment and registration of business organizations with the Corporate Affairs Commission (CAC).

  
3. It is NOT the type of business activity that a business organization engages in that makes it legally different from another business organization. For example, a company can be a trading business just like many sole proprietorship businesses are trading businesses.

‘Limited Liability’ and ‘Unlimited Liability’

If a business organization is a separate legal entity from its owners, then it is a “limited liability”.

Limited liability applies to both the owners of the business organization and the business organization itself.

- From the standpoint of the business owners, limited liability means that the money the owners can lose is limited to what they have agreed to contribute as capital or have already contributed as capital to the business organization.

- From the standpoint of the business itself, limited liability means that what can be used to settle the debts (liabilities) of the business is limited to the business assets, because the personal assets of its owners will NOT be added or used to settle the debts (liabilities) of the business organization.

Hint: Here is the thing! If a business is a separate legal entity from its owners; it follows that:
the assets and liabilities of the business are NOT the personal assets and liabilities of the owners; and the personal assets and liabilities of the owners are NOT the assets and liabilities of the business.   Why? Because the business is separate from the owners; and the owners are separate from the business.

Businesses organizations that are limited liability are: 

i.    Private companies

ii.   Public companies, 

iii.  Limited Liability Partnerships

iv.   Limited Liability Co-operative Societies, 

v.    Public Corporations.

On the contrary, for a business organization that is NOT a separate legal entity from its owners, its owners have unlimited liability,

This means that the liabilities of the business are also the personal liabilities of the owners. If the business assets are NOT enough to settle the debts (liabilities) of the business organization, the personal property of the owners would be added to settle the debts.

Unlimited liability exists with: 

i.   sole proprietorships, 

ii.  ordinary partnerships, 

ii.  co-operative societies that are not registered as limited liability.

In Summary
1. A business organization being a legal entity = separate legal entity from its owners = Limited liability of its owners.
2. A business organization NOT a legal entity = NOT separate legal entity from its owners = Unlimited liability of its owners.

Legal Forms of Business Organization
Now the forms of business organizations (or call it legal forms of business organizations) are:

1. Sole Proprietorship (or Private Enterprise): This is a business owned by one (1) person and is NOT a separate legal entity from its owner. This means a sole proprietorship business is NOT a legal entity, and therefore an unlimited liability business.

Remember: Unlimited liability means that if the assets of the business are NOT enough to pay for the debts of the business, the personal assets of the owner (in this case, the sole proprietor) would be used or added to pay the debts of the business.

2. Partnership: A partnership is a business owned by 2 to 20 persons and may be a separate legal entity or NOT  a separate legal entity from its owners. This means a partnership business may be a legal entity or NOT, and therefore a limited liability or unlimited liability.

That a partnership business may be a legal entity or NOT gives rise to the types of partnership, which are: 
(a) Ordinary partnership, also known as general partnership: This partnership is NOT a legal entity, meaning NOT a separate legal entity from its owners, and therefore an unlimited liability business. All the partners have unlimited personal liability for the liabilities of the business.

(b) Limited Partnership: This partnership is NOT a legal entity but at least one (1) partner in the business enjoys limited liability, other partners have unlimited liability.

(c) Limited Liability Partnership: This partnership is a legal entity, meaning a separate legal entity from its owners, and therefore a limited liability business. All the partners have limited liability.
Being a separate legal entity, a limited liability partnership is a body corporate, that is, it has a corporate status. A Limited liability Partnership would have its name ending with the abbreviation “LLP”.

Remember: Limited liability means that the debts of the business can only be paid from the assets of the business – the personal assets of the owners (in this case, the partners) would NOT be used or added to pay the debts of the business.

Note: Owners of a partnership business are referred to as partners.

3. Limited Liability Company  or (Joint-Stock Company): Limited Liability Company is also known as Joint-Stock company. There are 2 types of limited liability company, namely:

(a) Private Limited Liability Company (i.e. Private Company):

This is a business owned by 2 to 50 persons and is a separate legal entity from its owners.
This means a private company is legal entity and a limited liability business.

According to company law, a private company is allowed to have a minimum of 2 owners and a maximum of 50 owners.

Now owners of a company are called shareholders. So, we can say:  The law requires a private limited liability company (or private company) to have a minimum of 2 shareholders and a maximum of 50 shareholders.

Limited liability of a company means that the debts of the business can only be paid from the assets of the business – the personal assets of the owners (in this case, the shareholders) would NOT be used or added to pay the debts of the business.

Furthermore, being a separate legal entity, a private company is a body corporate, that is, it has a corporate status.

A private company would have its name ending with the word “Limited”, often abbreviated as “Ltd”.
An example of a private company would be: Senaipia Limited.

(b) Public Limited Liability Company  (i.e. Public Company): This is a business owned by a minimum of 7 shareholders and NO maximum limit and is a separate legal entity from its owners (the shareholders). This means that, just like a private company, a public company is a legal entity and a limited liability business. So the shareholders have limited liability for the debts of the business.
A public company is allowed by law to have a minimum of 7 shareholders but NO maximum limit.

Furthermore, being a separate legal entity, a public company is a body corporate, that is, it has a corporate status. A public company would have its name ending with the acronym “plc”.
An example of a public company would be:  Senaipia Plc.

4. Public Corporation (or Public Enterprise): A business owned by the government and is a legal entity (or is a separate legal entity from the government, its owner).

5. Co-operative Society: A co-operative society is a business organization owned by members of an association. A Co-operative Society must have a minimum 10 members but NO maximum limit.
First, a Co-operative Society business organization must be registered by the Registrar of Co-operative Societies in a State Ministry of Commerce and Industry.

At this point, the Co-operative Society is an unlimited liability, and its name would be somewhat like this: Senaipia Co-Operative Society.

If further registration is made, this time, with the Corporate Affairs Commission as a limited liability, then its name would now end with the word “Ltd”. An example would be Senaipia Co-Operative Society Ltd.

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