[PDF] Business Structures - CA Sri Lanka

Chapter 3 Forms of Business Organization

Mike and Gita asked their solicitor to explain the advantages and disadvantages of a private limited company for their taxi firm Advantages 1 Selling shares to a large number of people will raise large amounts of capital 2 All shareholders have limited liability 3 The company is a separate legal identity from its shareholders 4

12 Types of Organisation Summary Notes

A Public Limited Company is a company that is able to advertise and sell its shares to the general public via the stock exchange They must carry the letters PLC after their name to indicate that it is a Public Limited Company A disadvantage is that there is a dilution of control as the company has more owners (and voters) which thereby weakens shareholders’ ability to control the business Public companies often raise more share capital than

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(b) Public Limited Company (i) In Public limited company, the capital is collected from the public by issuing shares having small face value (Rs 50,20,10) (ii) The number of shareholders should not be less than seven, but there is no limit to their maximum number (iii) A public limited company has to file with the Registrar of Joint Stock

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1 (a) The Directors of EE recently converted the business from a private limited company to a public limited company Explain two possible benefits and two possible drawbacks to this business of the change [10] Content: Advantages of a plc – can sell shares to the public; rapid expansion possible

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1 What are the advantages or otherwise in establishing the Bank as a public limited company? The advantages of this model can be summarised as follows: • There are potentially more avenues available to raise capital, through share issuance • It possesses a more effective decision-making structure, through a single Board, with

Business Structures - CA Sri Lanka

Companies Limited by Shares These companies treated as public companies in which shares being issued to the public At least 03 directors and 01 shareholder require to establish and liability of the shareholders limited to the value of shares being purchased/contributed Note: Total share capital may consists of ordinary & preference shares

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A company may conduct trading activities as a primary purpose In contrast, an incorporated association may only trade if that trade is ancillary to the association’s purpose Where the company is a not-for-profit company, all funds raised by trading must be directed back to furthering the company's objects Winding up and the liability of

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needs, highlighting the advantages and disadvantages of an incorporation as compared to a partnership (10 marks) 10 James, Judas and Noah are directors of Hombarume Mines Limited The company was initially incorporated as a private limited liability company in 2001 Its objects clause authorises the company to prospect for and mine precious

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CA BUSINESS SCHOOL

EXECUTIVE DIPLOMA IN BUSINESS AND ACCOUNTING

SEMESTER 1: Preparation of Financial Statements

Business Structures

M B G Wimalarathna

(ACA, ACMA, ACIM, SAT, ACPM)(MBAPIM/USJ)

Introduction

As we discussed in chapter 01, every entity must identify & record business transactions for the given period and importantly such transaction (which are identified and recorded) should belongs to the given entity. An entity refers collection (pool) of interrelated group of people acting towards achieving common goal(s) and will be either one of the following;

‰Sole Trader

‰Partnership

‰Company

‰Non-profit motive organization

‰Trust

Period should be either a calendar year or an assessment year for local company.

Sole Trader/Sole Proprietorship

A Sole trader is a business owned by a person/an individual and control/manage by himself.

Key features:

‰Owner & controller is a same individual.

‰Not a legal entity.

‰Formation is not complex.

‰Need to obtain BRN & TIN.

‰For tax purpose, entity's income is treated as indiǀidual's income (owner)

Advantages Disadvantages

-Easy & inexpensive to form. -Not govern under strict rules & regulations. -Total autonomy over business decisions. -Enjoy entire benefits. -Not charge tax on business profit. -Unlimited liability since not treated as separate legal entity. -Limited skills & capabilities. -Cease the business when owner experience incapability. -Bear entire loss and liabilities.

Partnership

A Partnership is an association of two or more persons or entities that carry on business as partners with the common motive of earning profit. (how partnership differs from JV) A partnership could be form verbally, impliedly or in writing. Most of the partnerships carry on business in line with the provisions made in Partnership Agreement. Note: Key duties & responsibilities of each partners, contribution for capital, sharing of profit/loss, payment of salaries are generally included in a partnership agreement.

Key features;

‰Involvement of two or more individuals/parties.

‰Profit motive.

‰Common goal.

‰Not a legal entity.

‰Easy to form.

‰BRN & TIN to be obtain.

Advantages Disadvantages

-Easy to form. -Not involvement of much rules & regulations. -Combination of skills & capabilities. -Profit Motive. -Work towards a common goal. -Unlimited liability - Limited life time. -Disputes/Disagreement between each partners. -Partners act as a mutual agency. -Some decisions couldn't be implemented.

Company

A Company is a widely available business entity which treated as an independent legal entity. Legal entity - Entity (company) treated as a separate unit/person (legal) from the people who own, control and manage it. Generally, Shareholders (ordinary) are the owners of a company (public) whom received dividends as their compensation. Registration of a company generally involve complex procedures than sole trader and partnership. Initially, each individuals who are willing to act as shareholders, directors and company secretary must register at ROC and then simultaneously CRN can obtained from the ROC once register the company. Note: Most of the companies governed & controlled by the companies act. Further, company must adhere to the rules & regulations laid down by ROC/SEC & LKASs.

Types of Companies

Following major types of companies widely available in the business world.

‰Proprietary companies.

‰Companies limited by shares.

‰Companies limited by guarantee.

‰No-liability companies.

‰Unlimited companies.

Proprietary/Private Company

Most common form of companies which consists 1-50 shareholders and owned by the family members (generally). Essentially, proprietary company cannot issue shares to the public (can do private placement) but treated as a legal entity.

Companies Limited by Shares

These companies treated as public companies in which shares being issued to the public. At least 03 directors and 01 shareholder require to establish and liability of the shareholders limited to the value of shares being purchased/contributed. Note: Total share capital may consists of ordinary & preference shares.

Companies Limited by Guarantee

Consists same features as limited by shares except that shareholders will be liable to the amount agreed & guaranteed at the beginning but not for the value of shares acquired.

Advantages Disadvantages

-Limited Liability -Ability to raise funds/capital quickly -Recognition/reputation -Law tax rate compared to sole trader/partnership -Considerable amount of time & cost involvement to establish -Need to comply with rules & regulations -Responsibility carries towards public -Operational complexities

No-Liability Companies

As name implied, shareholders are not liable for any debt of the company due to the risk & uncertainty involve in operations and revenue sources.

Unlimited Company

Members/Shareholders of the company hold unlimited liability over company debts.

Non-Profit Motive Organization

An organization established with the main objective of maintaining healthy education, social, cultural level in the society as a whole. Since there is no profit motive, operations will be carried out with the assistance of various individuals and entities.

E.g.: UNA/WHO/Red Cross Society/Lions Club

Trust A trust is a collection of individual investors. A trustee is an entity/person act as an administrator for the pool of money & other assets of investors who invested together (outside) and distribute benefits among all such investors.

Family

Trust Unit

Advantages Disadvantages

-Tax minimization -Limited liability -Easy to form -Relatively not highly regulated -Additional complex laws & regulations to be follow -Depend on the trustee -Not much attractive in profit motive

Financial Reporting

Financial reporting of each of the above entities vary based on the applicability of various rules & regulations.

Sole Trader (too simple)

Partnership (simple)

Financial Reporting in Private Company (complex)

Public Company (too complex)

Trust (simple ~ complex)

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