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Key Competence 7: Sense of initiative and entrepreneurship (The Netherlands) Title: Legal Forms of Business Ownership Subtitle: Which legal form do I need for my start-up?

ABSTRACT

Almost 90% of the European private firms are small or middle sized enterprises (SME’s). There are just a few large companies which have hundreds or even thousands employees and very high revenues. In contrast to SME’s, the daily life in a large company is significantly different and usually harder. But for all enterprises is due; who is in charge within the organization and how does a company make money? On other words, how does the ownership of a firm affect its functionality and effectiveness? These are questions dealing with the legal form of a business ownership in the private sector. Learning Objectives At the end of this case study, you should be able to:

Understand the different forms of business ownership and their complexity; - Understand the differences between these legal forms concerning ownership, management,

legal duties, and other related subjects; - Distinguish the advantages and disadvantages of different forms of business ownership; - Understand the appropriateness of different business ownership’s forms; - Have learn a number of key terms, such as - holding company, venture capital, trusts, etc.; - Know the differences and similarities of business forms among the countries in the European

Union; - Know what is the Societas Europaea (SE) and how to apply this concept.

CONTENT

As start-up you have to decide which legal form of company you will have. In this case, you will start describing the forms of business ownership in the private sector, learning about their specific advantages and disadvantages. Finally you can do an exercise where you must work out the legal forms of business ownership in your country. Therefore you can use the business ownership structure as used in this case. You also have to pay attention to the Societas Europaea (SE), the European form of business ownership.

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How to do?

In Figure 1 you will see the forms of business ownership.

Figure 1 – Forms of Business Ownership

Task 1 Take a look at Figure 1, with the forms of business ownership in the private sector. After you studied the figure you must fill in the table below:

Form of Business ownership

Ownership and control

Management

Responsibility for the debts of the business

Capability to get money

Legal responsibilities

Profits and losses

Sole traders One owner

Owner

Owner is full responsible. No difference private and business money

Hard to get a loan

No legal responsibilities except for VAT duties

Are for the owner

Partnerships

Co-operatives

Private Limited Companies

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Public Limited Companies (PLC)

Conclusion

One of the first decisions you should make when you start an enterprise, is the choice of the legal form of your company. Which form you will select depends on several reasons, like how much starting capital do you need and how much a private person or persons can invest. What are the legal consequences of each form, how many persons will start up a company etcetera? In short, there are a lot of factors to consider deciding the most appropriate legal form and this differs from situation to situation. In this case, we have distinguished 5 different forms of business ownership.

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Answers

Task 1

Form Onderschip Management Responsibility Capability to get money

Legal responsibilities

Profits and losses

Sole traders One owner Owner

Owner is full responsible for private and business money.

Hard to get a loan

No legal responsibilities except for VAT duties

Are for the owner

Partnerships Two or more Partners y y

y y

Co-operatives Two or more Partners y y y y

Private Limited Companies

Two or more shareholders (by name)

Employee n n y y

Public Limited Companies (PLC)

Many share olders (anonymous)

Board n n y y

Note: Franchising is not a legal form itself. A franchise company often is more or less a member of a chain of enterprises. The members of this franchise chain can have different forms of business ownership.

Example

An overview of company forms in Switzerland

The most important business structures are:

- sole proprietorship (D: Einzelfirma, F: raison individuelle) - limited company (D: GmbH, F: Sàrl) - stock corporation (D: AG, F: SA)

Which business form is the best one for me? There is not one best solution, but different situations require different structures. Here is an overview indicating some key advantages of each structure: Sole proprietorship (D: Einzelfirma, F:raison individuelle) When you start a business alone and under your own name, it implies that your business is a sole proprietorship. Advantages : - no lower requirement on equity - ease of formation - no legal formalities - low costs to create and operate - the net profit of the company is taxed as income of the owner Disadvantages: - only 1 owner - unlimited personal liability (the business = the owner) - risk of personal bankruptcy - the name of the company has to include name of the owner

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Limited company (D: GmbH, F: Sàrl) A limited company offers better protection (less liability) than a sole proprietorship or a partnership. It also implies a higher cost than a sole proprietorship. A minimum of 2 persons is required to incorporate a limited company. The company starts to exist when it is registered with the Registrar of companies (D: Handelsregister,F: Registre du Commerce) Advantages:

- A minimum investment commitment of CHF 20'000.- is required (less than a corporation) - The founders liability is limited to the difference between CHF 20'000.- and the lower amount

that has already been invested by the founders. For example: If paid-up capital is CHF 15'000 out of total capital of CHF 20'000, then the partners remaining open liability is only CHF 5'000 - The company is a legal entity on its own - The company can relatively easily be transformed at a later stage into a limited company (SA) - Any name can be used for the company as long as it includes GmbH or Sàrl - Relatively simple legal formalities - No audit is required by law Disadvantages: - Transfer of ownership is cumbersome - Upper limit of capital: CHF 2'000'000.- - Number of partners is limited by law - The net profit of the company is taxed independently of the income of the partners Stock corporation (D: AG, F: SA) A corporation offers the best protection and the easiest transfer of ownership but includes high costs and strict legal formalities. A minimum of 3 persons is required to incorporate a stock corporation. Advantages: - Personal liability is restricted to the capital investment or commitment - Shares can easily be transferred - Any available name can be used for the company (with or without AG or SA) - It is easier to find investors - The corporation is a legal entity (person) on its own Disadvantages: - Minimum capital of CHF 100'000- is required, 20% but at least CHF 50'000- has to be paid cash - Double taxation: the company is taxed on its profits and the share holder are taxed when they receive a dividend - Higher costs to incorporate and operate the corporation - A yearly audit is required

Assignments :

As start-up you want to test yourself if you are capable to make the right choice. Now you are asked to do the six assignments below:

Assignment 1 While looking at the debt responsibility, a lot of people won’t choose being a sole trader (one person enterprise) or a partner in a partnership. Therefore start-ups often choose for a private limited company. But they are forgetting that besides the money needed to set up a limited company, this limited company also has a tax obligation itself. So, in fact, you pay taxes twice: paying for the company and yourself as an owner. Moreover, a lot of countries provide some tax advantages to sole traders and partnerships. So always be careful when you have to make this choice!

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Please mention three reasons why you as start-up entrepreneur should select a limited company as the legal form of your enterprise. Assignement 2 Please mention at least 3 examples per form of business ownership. Copy and paste the logos and the website addresses of these companies to an A4-paper. Assignemet 3 Re-do assignment 1 and 2 for another country within the European Union. Tip: see links Assignement 4 Sample the assignments 1 till 3. Now you have an overview of a lot of countries within Europe. Compare the overviews and make a little report out of it. For instance, reporting the forms, the differences, what is remarkable, what are advantages from one country compared to the others, etc. In reality, the issue of ownership is very complex. Large businesses tend to have multiple arms, and all of them could have a different form of ownership. Part of the business may be 'floated', leaving other sections as limited companies. Assignament 5 Take articles from a current newspaper about business takeovers or similar that highlight an ownership issue (there is generally plenty of such information available in the broadsheet 'business' sections or on the Web - just type in 'flotation', ‘takeover’ or 'merger' into a search engine like 'Google'). Make a little report about it and explain the terms or words dealing with the ownership issue which were not mentioned before in this case study. Assignment 6 Try to find out which company forms from other European countries are legal in your country. Compare those with the data you already found throughout the other assignments. What are the main similarities and what are the differences? Gather again the information you found, because this gives you a nice overview of the situation within Europe. WHAT NEXT??

Links:

Definition and type of SME’ s in European Union:

http://europa.eu.int/scadplus/leg/en/lvb/n26026.htm

Company Forms in Sweden:

http://www.startupcafe.ch/discover/w_faq.jsp#7

Company Forms in Germany:

http://www.eurofound.eu.int/emire/GERMANY/FORMSOFCOMPANY-DE.html

Forms of Business Ownership in USA:

http://www.sba.gov/starting_business/legal/forms.html

www.nsbdc.org/resources/ documents/images/FormsofOwnership.pdf

Image:Source: www.bized.ac.uk

Self-Assessment: 1. Try to get feedback, if possible, from peers, partners and a coach (chamber of commerce?)

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2. Try to answer the following questions:

2.1 What did you learn (give two examples)? 2.2 Will you be able to apply this knowledge in your profession? 2.3 How was your planning to do the tasks? 2.4 Could you compare your planning with your fellow students (if applicable)?

3. Would you be so kind to provide us with some suggestions, so that we can upgrade this case study if needed?