Business Organizational Form in U.S. Particular in sole proprietorship and Corporation

By Park Kanjanapaibul

Introduction

One of the questions faced by any entrepreneur who wishes to start up a business is what form of business organization that he or she should choose for the business. The primary factor of undertaking a business is to make profits. Due to the fact that there are diversity of business organization, entrepreneurs must choose the most appropriate business organization for their nature of business. The Law has a vital role on this issue because of the regulations that govern each organization are different. Mistake on selecting a business form can cause different effect, the profit which was expected may not reach the goal. The important factors stipulated by the law that should be considered before choosing the business form that are :

Currently, in Thailand, to set up the limited company, only three shareholder is required. Having only three persons instead of seven sign the Memorandum of Association (MOA) will make the incorporation process easier and faster. In addition, it can solve the problem of nominee shareholders holding minority shares. In the United Stated of American, only one person is able to own the corporation. Moreover there is the other type of undertaking business that is sole proprietorship which is also owned by only one person. However, the regulation or law governing these two types of business are different. Therefore, it is the entrepreneur's choice to make which business type that he or she will carry out. According to this trend, in the future, Thailand has a chance to adopt the concept of law from the United Stated that is Thai company may be able to have only one owner (shareholder) for doing the business. As a result of the advance of U.S. corporate law, therefore, studying from business entity according to U.S. law would be more beneficial to understand the concept of  business organization.

Paper's objective are :

  1. To understand the nature and functions of business organizations or entities in the United States.
  2. To identify the advantages and disadvantages of either operating the business as a sole proprietorship or as a corporation in order to make suggestion that what kind of business should be sole proprietorship or corporation based on U.S. law.

This paper will focus on the aspects of sole proprietorships and corporation according to the United States law and make a comparison in order to demonstrate the advantages and disadvantages of each form. After outlining a major forms of business organization in the United States, this paper will especially explain about sole proprietorships and corporation (not include form of S corporation) related to formalities, liability, continuity, taxation and transferability. Then, this paper will show the advantages and disadvantages of each form. Finally, this paper will analyze the characteristic of those two business forms in order to answer the question that which business form is better to be carried out between sole proprietorships and corporation. For further studying, the appendix of this paper contains the information of forms of business organizations in Thailand.

The major forms of business organization in the United States

For better understanding the issue, it is necessary to know the types of business organization in the United States. That are :

(A) Sole Proprietorships
A sole proprietorships is the simplest form of business. A sole proprietorship is a one-person business that is not registered. In this form, the owner is the business that is, the business is not a separate entity from the owner. The owner has full control of the organization and takes all the risks including being personally liable for all business debts. The owner must reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business. The sole proprietor business form will be discussed in detail in the next part of this paper.

(B) Partnership
A partnership arises from an agreement, express or implied, between two or more persons to carry on a business for profit. Partners are co-owners of a business and have joint control over its operation and the right to share the profits. It is not treated as an entity except for limited liability purposes. Partners have unlimited liability for partnership debts and each partner normally has an equal voice in management. Income tax is paid as a personal tax of the individual partner. No particular form of partnership agreement is necessary for the creation of a partnership, but in practical way, the agreement should be in writing. Basically, the partners may agree to almost any terms when establishing the partnership so long as they are not illegal to public policy.

The Law Governing Partnership is the Uniform Partnership Act (UPA) that governs the operation of partnerships in the absence of express agreement and has done much to reduce controversies in the law relating to partnerships. The UPA defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit" [UPA 6(1)]. The intent to associate is a key element of a partnership, and one cannot join a partnership unless all other partners consent [UPA 18(g)].

Under the UPA, all partners have equal rights in managing the partnership [UPA 18(e)]. Each partner in an ordinary partnership has one vote in management matters regardless of the proportional size of his or her interest in the firm. Each partner is entitled to the proportion of business profits and losses designated in the partnership agreement. If the agreement does not apportion profits or losses, the UPA provides that profits shall be shared equally and losses shall be shared in the same ratio as profits [UPA 18(a)]. Each partner, however, can be held fully liable for all debts of the partnership.

Limited Partnership

A limited partnership is similar to the general partnership. It consists of one or more general partners, who have unlimited liability for partnership losses, and one or more limited partners who are liable only to the extent of their contributions. Usually, a limited partner does not have as much input as the other partners and like the other partnerships must report income on personal tax forms. A limited partner has no right to participate in the general management or operation of the partnership and assumes no liability for partnership debts beyond the amount of capital that he or she has contributed. Thus, one of the major benefits of becoming a limited partner is this limitation on liability. Unlike corporate shareholders who can serve as officers and directors and still have limited liability, if a limited partner gets involved in the control of the limited partnership, he or she may lose limited liability.1

Unlike general partnership, it is created by compliance with state law which includes the paying of fees and the filing of a certificate. Much of the structure of the limited partnership is usually established by the provisions of the certificate or contract among the participants

Limited Liability Partnership (LLP)

Typically, an LLP is formed by professionals who work together as partners in partnership. Generally, LLP statutes allow professionals to avoid personal liability for the malpractice of other partners. The LLP is taxed and controlled like an ordinary general partnership, except that the partners are not liable for the liabilities of the partnership or for the negligence of other partners. A partner is still liable for her own negligence.

(C) Corporations

A corporation is formed in compliance with statutory requirements. it is a legal entity separate and distinct from its owner with many of the rights and responsibilities of a person. It can have perpetual existence. The shareholders elect directors who set policy and hire officers to run the business and the investors have limited liability and shareholders are not responsible for the corporation's debts. The corporation files its taxes just like an individual. If the corporation makes a profit and distributes dividends, it cannot deduct the dividends from its taxes and the individual recipients must also pay taxes. Therefore, a corporation is taxed twice on its earnings.

In U.S., there is another format of corporation called "S corporation". It has a significant role in tax consequences is the S corporation. The S corporation is a corporation which has elected to be taxed under the provisions of Subchapter S of the Tax Code. This provision allows a corporation to pay no tax. Instead, all the corporate income is taxed to the shareholders, whether or not such income is actually distributed thereto. Subchapter S corporations are generally treated like partnerships for tax purposes. Certain restrictions may preclude election as a Subchapter S corporation, such as the requirement that there be a maximum of 75 shareholders, or the preclusion of non-resident alien or corporate shareholders, or the use of only one class of shares.

(D) Limited Liability Company (LLC)

The LLC is a hybrid form of business organization that offers the limited liability feature of corporations but the tax benefits of partnerships. All of the members2 in a limited liability company have limited liability for the debts of the business. The intent of this new kind of business entity is to provide additional business organizations with limited liability, but without the double taxation consequence of corporations or the restrictions of the S Corporation.

The limited liability company regulation has no restriction on the number of shareholders who may be called members (although too large a number may deem it publicly traded and subject it to double taxation). Although the legislation differs among the states in U.S., limited liability companies generally apply limited liability and centralized management by an entity such as a board of directors.

Like corporations, LLC must be formed and operated in compliance with state statutes. In an attempt to created more uniformity among the states in this respect, in 1995 the National Conference of Commissioners on Uniform State Laws issued the Uniform Limited Liability Company Act (ULLCA). Some provisions are common to most state statutes. For example, in an LLC the owners who are called "members" themselves can normally decide how to operate the various aspects of the business by forming an operating agreement. This agreement generally contain provisions relating to management, how profits will be divided, the transfer of membership interests, whether the LLC will be dissolves on the death or departure of a member, and other important issues.

Starting a business : Sole proprietorship or Corporation

The choice between the corporate form and sole proprietorship depends on comparing the different attributes of the two forms and then determining which attributes are significant to one's business. The key considerations are formalities, limited liability, free transferability of interests, continuity of existence, centralized management, costs, access to capital and taxation. Forthcoming information will detail these considerations of each entity.

The Sole Proprietorship

The sole proprietorship is the most common form of business structure for small businesses. It is viewed as being one and the same as its owner. This characteristic has the advantage of simplicity but also has the disadvantage of personal liability.

Since a sole proprietorship has no formal elements of co-ownership, it is usually not thought of as "business organization" in the legal sense. However, the fact is that business owned by sole proprietor may be large and complex and involve many people.

There are no formal requirements for the formation or operation of a sole proprietorship and ownership and management can exist in the sole owner. Although, it is quite easy to operate but there may still have some regulation to comply with such as local registration, business license, or permit laws to make the business legitimate. Sole proprietor is personally responsible for paying both income taxes and business debts. The owner can employ people as agents to represent and work for the business.

Formalities

The sole proprietorship is the simplest way of doing business. Setting up a sole proprietorship often does not require registration of the business. The costs of formation are very low and there is very little formality required. If the name of the business is different from the name of the owner, the sole proprietorship must registered the business name. If the owner's name is used, it will be in the form of first name, last name or simply last name.

Any licenses or permits required must be obtained, such as business licenses, zoning occupancy permits and tax registrations, depending on the nature of the business.

Most cities and many counties do require businesses, even tiny home-based sole proprietorships, to register with them and pay at least a minimum tax. In return, that business will receive a business license or tax registration certificate.

Liability

The law imposes that the owner of a sole proprietorship has unlimited personal liability. The proprietor is personally responsible for all business losses and must bear them to the full extent of available personal assets. This risk of unlimited liability may be diminished to some extent by insurance, but it may be costly and impracticable to insure against every conceivable business hazard. In matter involving with contract, the sole proprietor can limit the liability by agreement that any liability shall be limited to the business assets and shall not extend to the personal assets of the proprietor. A sole proprietor may hire employees to help manage the business, but the owner will have legal responsibility for the decisions made by the employees and ultimate control over the business on the basis of law of agency.

Transferability of interest

a sole proprietor can sell or grant any asset because there is no legal distinction between the business and the sole proprietor, in other words A sole proprietor can freely transfer a business by selling all or a portion of the assets of the business. Transferring one's interest in a sole proprietorship is very easy. It is just preparing an asset purchase agreement and sells the assets. The assets of a sole proprietorship are transferred with the estate of the owner upon death. However, the proprietor's estate can sell the assets or continue to operate the business as the heir's will.

Continuity of existence

The sole proprietorship terminates by law upon the death of the sole proprietor. A sole proprietorship exists only as long as the owner is alive or until the owner decides to close the business in other words, The sole proprietorship remains in existence for as long as the owner is willing or able to stay in business. When the owner dies, the sole proprietorship no longer exists. The assets and liabilities of the business become part of the owner's estate.

Management

Due to being only one owner, Management control of the business is completely in the hands of the sole proprietor. The control of a sole proprietorship belongs entirely to the owner, who also assumes the full risk of the business.

Taxation

A sole proprietorship has pass-through3 taxation. The business itself does not file a tax return; rather, the income passes through and is reported on the owner's personal tax return. The owner reports business income or losses on his or her individual income tax return. A sole proprietor is taxed on all income from the business at applicable individual tax rates. The business income, and allowable business expenses, are reflected on the individual tax return. The law provides that all sole proprietorship's income or loss will be treated as individual income or loss and taxed accordingly.

Advantages of a Sole Proprietorship
Disadvantages of a Sole Proprietorship
Corporation

A corporation is a legal entity formed in compliance with statutory requirements. The entity is distinct from its shareholder owners. The corporation is the most sophisticated form of business entity and the most common among large companies. A corporation can be owned by a single person or numerous people. The corporation represents itself for its shareholders in conducting the business and in incurring liability, yet its power to act and its liability are separate and apart from the individual who own it.

Formalities

In forming a corporation, at least one person must act as the incorporator. He or she is responsible for filing the articles of incorporation (sometimes called a charter or certificate of incorporation). The articles of incorporation are usually filed with the secretary of the state. The articles of incorporation contain some basic information about the company and must comply with statutory requirements. The name of the corporation must be different from the name of any other corporation to avoid confusion or deception. Corporations must also use a denomination after the name, such as the words "Inc.," "Corp.," "Ltd." to make clear that the company is a corporation. The articles may also contain other significant discretionary provision authorized by the statute.

Under MBCA section2.02(a), the articles of incorporation include:

  1. The name of the corporation, which must be followed by a corporate indicator such as "Corporation", or "Ltd."
  2. The address (not a post office box) of the corporation's registered office and the name of the registered agent at that office. The registered agent is the person to be served if the corporation is sued. This is an office for legal purposes and does not have to be the corporation's business office.
  3. The length of time that the corporation is to exist. This duration can be perpetual or renewable.
  4. The number of shares which the corporation is authorized to issue.
  5. The name and address of the incorporator.

Upon acceptance of the articles of incorporation by the state official, corporate existence commences. Once the corporation exists, all further actions on the corporation's behalf must be taken by the incorporator. In order to complete the formation of the corporation, the incorporator must adopt a set of bylaws, hold the initial shareholders' and directors' meetings, arrange for the election of directors and officers, open a bank account for the corporation, issue the shares and conduct other significant initial acts. The bylaws contain the internal rules dealing with the governance of the corporation. Unlike the articles of incorporation, the bylaws are not publicly filed. Once established, the corporation must comply with the requirements of the state statutory scheme such as holding annual meetings of both directors and shareholders.5

In addition, Corporations and their owners must observe certain formalities to retain the corporation's status as a separate entity in order to maintain personal limited liability. Specifically, corporations must:

Liability

Owing to the fact that the corporation is a separate juridical person and is liable for its own debts. Corporate shareholders normally are not personally liable for the obligations of the corporation. Creditors may not reach the assets of the owners. This because fewer persons would be willing to invest if they subjected all of their assets to the risks of the business enterprise. Limited liability encourages investment by causing the assemblage of capital. Shareholders who purchases shares will not take the risk that if the corporation is ultimately held liable, they will lose all or part of their investment.

However, this protection is not inflexible. Individuals can be held liable when it can be shown that the incorporation process was not performed properly (defective incorporation), when one personally signs a contract without explicitly stating that it is on behalf of the corporation, and when a court decides to pierce the corporate veil and remove the limited liability protection.

Transferability of interest

The interest of corporation is a share or stock of the corporation because it can express right or ownership in the corporation.Transferability of shares is an important feature of incorporation of corporation. Stock certificates generally are negotiable and freely transferable. The existence of any restrictions must be noted on the face of the stock certificate, and these restrictions must be reasonable.

Sometimes, corporations restrict transferability by reserving the option to purchase any shares offered only for a shareholder of the corporations. This called "right of first refusal"6. This right could remain for merely a specified time or a reasonable time.

When shares are transferred, a new entry is made in the corporate stock book to indicate the new owner, Until the corporation is notified and the entry is complete, the current record owner still has the right of the shareholder.

Continuity of existence

A corporation has the capacity to exist perpetually so it is unaffected by the death of an owner or manager or the transfer of ownership interests. The articles of incorporation can provide for perpetual existence and, as a result, the corporation can continue without interruption upon the death or withdrawal of any of its shareholders, officers or directors.

Corporate existence may come to an end through compliance with the applicable state statute. The methods of terminating corporate existence have traditionally been characterized as voluntary dissolution, involuntary dissolution and forfeiture of the corporate charter. Nonetheless, despite the possibility of termination of its existence, the corporation usually has the power to continue in existence forever.

Management

Corporation is managed by a board of directors7,elected by shareholders, and by officers that the board has appointed. The owners of the business are the shareholders, who contribute cash, property, or services in exchange for their ownership rights, evidenced by shares of stock in the form of share certificates. It is possible for a shareholder to also be a director and an officer, but the rights and responsibilities of each  group are clearly segregated in corporate law.

Taxation

Corporations, like natural persons, are subject to taxation by the federal, state, and local governments based on the amount of income they earn each year. As a result of the separate corporate ersonality, the corporation is regarded as a separate taxable entity. This eparate entity taxation is a significant distinguishing characteristic of the corporation from other entities, where income is merely considered from the individuals who own the business organization.

Double Taxation: The concept of double taxation came from the law imposing that the both individual and corporation must pay tax for their income. Yet, This taxation is applied only for earnings paid out to shareholders in the form of dividends that is, profits paid by the corporation to its shareholders in return for their investment in the corporation. Therefore if dividends are not distributed, shareholders will not be taxed again as a personal income.

In practice, this sort of double taxation seldom occurs in a small corporation. The reason is shareholders rarely pay themselves dividends. Instead, they work for the corporation and pay themselves salaries and bonuses. Because the corporation can deduct salaries and bonuses as ordinary and necessary business expenses, it doesn't have to pay corporate tax on them. Another practical approach to double taxation is to leave the corporate profits in the business and not distribute dividends. Then, only corporate tax rates are applied, and while the retained profits will increase the value of the stock, resulting in a capital gains when the stock is sold, no individual income tax is applied to the profits  themselves.

the Advantages of incorporating
Limited Liability

When a business becomes incorporated, an individual shareholder's liability is limited to the amount he or she has invested in the company. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities. The limited liability will ensure the entrepreneurs to operate the corporation without anxiety of business failure which would affect to their personal assets.

Perpetual Continuity of Existence

the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes. A corporation continues to exist until the shareholders decide to dissolve it or merge with another business. The business will not be impacted by death of shareholder, this makes the business steady.

Freely Transferable Shares

In accordance that shares of corporations are freely transferable, so it is easy to transfer ownership in a corporation. As a separate entity, ownership can change without affecting the business. If a current shareholder decides to sell his or her shares, the corporation continues with new ownership. A corporation is not terminated or dissolved even when shareholders die or sell their shares.

Easy to Raise Capital

Because of limited liability, ease of transfer of shares and perpetual continuity, investors are more attracted to investing in corporations rather than in sole proprietorships and partnerships. This attraction allows corporations to raise the capital needed to manage and expand their operations. The stock structure of a corporation makes it attractive to investors. Coordination with Limited liability, capital formation is surely encouraged.

Credibility of Organization

Regularly, people believed that corporate business form is more stable than unincorporated businesses. Having the words "Inc" or "Corp" in the business name gives a positive perception of long term financial stability.

Disadvantages of incorporating
Complex formalities

Besides of the plenty of process to set up the corporation, there is a lot more paperwork involved in maintaining a corporation for example, the corporation must maintain a minute book, containing the corporate bylaws and minutes from corporate meetings. Other corporate documents must be kept up to date at all times, include the register of directors, the share register, and the transfer register. This causes burdensome to the corporation.

Load of Expense

There are many expenses to incorporate. The owner must pay fees when incorporating a business. A corporation is a more complex legal structure than a sole proprietorship or partnership so corporations are more expensive to set up. There are four types of fees: a fee to file the Articles of Incorporation with the Secretary of State, a first-year franchise tax prepayment, fees for various governmental filings, and attorneys' fees.

Double Taxation

The profits of a corporation are taxed first as income to the corporation, then second as income to the shareholder in case of distribution of dividend. Then, if the corporation distributes some of the net income to the shareholders as a dividend, the dividend will be taxed again on the shareholders' personal income tax returns.

Comparative table of sole proprietorship and corporation

characteristic Sole Proprietorship Corporation
Method of Creation Created at will by owner. License issued by authorization.
Legal Position Not a separate entity; owner is the business. Always a legal entity separate and distinct from its owners - a legal fiction for the purposes of owning property and being a party to litigation.
Liability Unlimited liability. Limited liability of shareholders - shareholders are not liable for the debts of the corporation.
Duration Determined by owner; automatically dissolved on owner's death. Can have perpetual existence.
Transferability of interest Interest can be transferred, but individual's proprietorship then ends. Shares of stock can be transferred.
Management Completely at owner's discretion. Shareholders elect directors, who set policy and appoint officers.
Taxation Owner pays personal taxes on business income. Double taxation � corporation pays income tax on net profits, with no deduction for dividends, and shareholders pay income tax on disbursed dividends they receive.
Organizational Fees, Annual License Fees, and Annual Reports None. All required.

Evaluation

As information mentioned above, either sole proprietorship and corporation has its own advantages and disadvantages. Consequently, it depends on the business , that will be operated, that which one is more suitable for which type of business form.

There is a significant difference in whether undertaking business as a sole proprietorship (personal entity), or establishing a separate legal structure as a corporation. The sole proprietorship is certainly easier in terms of management, paperwork and tax filings. This ease comes with some additional exposures that is unlimited liability of owner because the business is totally co-mingled with the owner's personal assets.

By establishing a legal entity as a corporation, it is division of the business from personal assets. There would be a layer of protection by limitation of liability of the owner, but this also comes with a high cost. Furthermore, the owner must comply strictly with the law to maintain this limited liability. Many formalities and paperwork are required. Unlike the corporation, a sole proprietor requires no grant or charter to exist.

Apart from the liability that must be considered, taxation is also the major factor to be considers in choosing a business form. Selecting of a particular business entity requires careful tax planning to ensure that the income earned by the business will be taxed at reasonable rates. Referring to the taxation of sole proprietorship and corporation, personal income tax of the sole proprietor and double taxation of corporation must be compared in order to know which one is lessen. In common sense, sole proprietorship has lower tax rate than corporate tax rate, but if the sole proprietorship has exceeding profits, individual tax rates may surpass the corporate tax rate which may have some tax benefits. In this case, corporation should be more appropriate business form.

The question that happens is what kind of business that should be incorporated. Due to the purpose of profit, the vital essential to be contemplated is the financial benefits of the business. Acquisition of limited liability must be traded with the high cost of forming the corporation. Therefore, the entrepreneur must deliberately reconsider the aspect of his or her business. Some features of the business that should be incorporated are as follows :

On the other hand, for businesses that do not have large profit and not need to issue a share to assemble the capital, forming a corporation probably is not worth the added expense. Therefore, incorporating may not be beneficial for a small businesses that does not have the massive risk of liability and sufficient fund to incorporate.

It is believed that It is possible to commence a business as a sole proprietorship to obtain the lower expenses and tax rates in the early stages of development and subsequently incorporate the business when the business is grown and more profitable and when the individual tax rates surpass the corporate rate for the more favorable tax rates.

Conclusion

When deciding which form of business organization would be most appropriate, several factors, which regulated by the law, ought to be considered, including formalities of each form, the liability of the owners, tax consideration and the need of capital. Each major form of the business organization offers distinct advantages and disadvantages on these factors.

Sole proprietorship is the easiest type of business entity to form, but there is one major drawback. Unlimited liability is a major factor to be considered in choosing the form of sole proprietorship. Sole proprietors face unlimited liability if their business is sued. In other words, they bear the risk of all of their personal assets if someone sues their business. Consequently, limited liability of owner in corporation can solve this problem. Yet, It is costly to form corporation. It may happen to be in a small business where the liability is very limited because of the nature of that business. In this case, the cost of incorporating may outweigh the benefits.

Referring to taxation, If the business is small and the owner has little income from other sources, the individual tax rates as applied to income from a sole proprietorship may be lower than corporate tax rates. Therefore, the business should not be incorporated until the personal tax rate exceeds corporate tax rate.

As mentioned in this paper, it expresses that corporations make sense for business owners who (1) run a risk of being sued by the other for a lot of business debts, or (2) have substantial personal assets which they want to protect from satisfaction, or (3) want to raise the business's capital, but sole proprietorships make sense in a small business where personal liability is not a important concern. Sole proprietorship is a good business organization for an individual starting a business that will remain small, does not have great exposure to liability, and cannot provide the expenses of incorporating and corporate formalities.

At last, the characteristic of each business will be the answer of the question that which business organization is better among sole proprietorship and corporation.

BIBLIOGRAPHY

  1. Arthur R. Pinto & Douglas M. Branson. 2004. Understanding Corporate Law-2nded.. LexisNexis Group
  2. John E. Moye.2005. The Law of business organization. Thomson Delmar Learning
  3. William A. Klein. 1982. Business Organization and Finance : Legal and Economic Principles. Foundation Press
  4. Roger Leroy Miller & Gaylord A. Jentz. 2003. Business Law Today-6thed. Thomson Learning
  5. G.B. Lowe. 1983. CPA Business Law Review-2nded. South-Western Publishing
Internet Sources
  1. Nolo : Legal Solutions. Available at : http://www.nolo.com/legal-encyclopedia/article-29694.html
  2. QuickMBA : Knowledge to your Business. Available at : http://www.quickmba.com/law/
  3. Sole Proprietorship: The Right Business Structure?. Available at : http://sbinformation.about.com/od/ownership1/a/soleproprietor.htm
  4. When to Incorporate. Available at : http://www.professionalreferrals.ca/2004/01/when-to-incorporate/
  5. Corporate Formalities. Available at : http://www.residual-rewards.com/Corporate-Formalities.html
  6. Doing Business as a Sole proprietor. Available at : http://www.poznaklaw.com/articles/solep.htm
  7. My own business. Available at : http://www.myownbusiness.org/s4/

APPENDIX

Forms of Business Organizations in Thailand

The principal forms of business organizations under Thai law are sole proprietorship, partnership, limited company, and public limited company.

Sole proprietorship

In a sole proprietorship, all of the proprietor's asset (business and personal) are subject to attachment or any other legal action, whether connected to the business or not. Registration is made at the Revenue Department, where the sole proprietor must acquire a taxpayer number. Some sole proprietorships are required to obtain a "Commercial Registration Certificate" from the CRD.

Partnerships

In Thailand, three forms of partnerships are permitted: (1) unregistered ordinary partnership, (2) registered ordinary partnership, (3) limited partnership. Although the liabilities attached to the partners vary in these different forms of partnership, the general rules governing all types of partnerships are similar. Under the Civil and Commercial Code ("CCC"), a partnership is defined as a contract whereby two or more persons agree to unite for a common undertaking with a view to share the profits.

Limited Company

Under Thai law, there are two types of limited companies: (1) the limited private company and (2) the limited public company.

Commonly, the entrepreneur who desire a more permanent business in Thailand opt for a private limited company which is governed by the CCC. Shareholders' liability is limited to the remaining, if any, amount unpaid on the shares respectively held by each shareholder. The Board of Directors manages a limited company in accordance with the law and the company's Articles of Association. The is under the control of the shareholders' assembly.

A public limited company, governed by the Limited Public Company Act B.E. 2535, is a company that is established with the purpose of procuring investment from the public in general by the offering of its shares. The rules and regulations concerning the procedures for offering shares for sale to the public are found in the Securities and Exchange Act B.E. 2535 under the control of the Securities and Exchange Commission.

Source : SBC International Law Associates Company Limited