1. 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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2. 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:
Responsibility Legal Profits
Form of Ownership Capability
for the debts responsibilities and
Business and Management to get
of the losses
ownership control money
business
Owner is full No legal Are
responsible. responsibilities for the
One No difference Hard to except for owner
Sole traders Owner
owner private and get a loan VAT duties
business
money
Partnerships
Co-
operatives
Private
Limited
Companies
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3. 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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4. Answers
Task 1
Capability Legal Profits and losses
Form Onderschip Management Responsibility to get responsibilities
money
Owner is full No legal Are for the owner
responsible for Hard to get responsibilities
Sole traders One owner Owner except for VAT
private and a loan
business money. duties
y y
Partnerships Two or more Partners y y
Co-operatives Two or more Partners y y y y
Two or more y y
Private Limited
shareholders (by Employee n n
Companies
name)
Public Limited Many share olders y y
Board n n
Companies (PLC) (anonymous)
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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5. 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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6. 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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7. 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?
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