elucidate the legal aspects of small business
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When starting up a new business it is very important to look at the legal aspects which will influence the company in the future. In this part of the information file there will be the most important legal aspects for running a student company. First there is the selection of business form, in which there will be a compairison between the different possible forms. Afterwards a description of how the student company will work with contracts and partners. And finally there is an explanation of the typical dutch legal aspects such as profit tax and dividend.
Business form
Most important before starting the actual business is to compare the different possible legal business forms to make sure that it suits the intentions of the entrepreneurs. First the expanation per legal form will be given and afterwards a choice will be made for the student company itself.
There are three basic legal business forms which can be chosen when starting up a new company: sole proprietorship, partnership and corporation. Each will be described shortly and afterwards the form of the student company will be given.
Sole proprietorship:
The sole proprietorship is the oldest, most common, and simplest form of business organization. A sole proprietorship is a business owned and managed by one person.
The prevalent characteristic of a sole proprietorship is that the owner is inseparable from the business. Because they are the same entity, the owner of a sole proprietorship has complete control over the business, its operations, and is financially and legally responsible for all debts and legal actions against the business. Another aspect of the “same entity” aspect is that taxes on a sole proprietorship are determined at the personal income tax rate of the owner. In other words, a sole proprietorship does not pay taxes separately from the owner.
A 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 does not justify the expenses of incorporating and ongoing corporate formalitie.
Partnership:
Partnership is a business association of two or more persons. These “persons” can include individuals, groups of individuals, companies, and corporations, therefore partnerships are highly adaptable in form and can vary in complexity. Each partner shares directly in the organization’s profits and shares control of the business operation, making it very profitable for the owners when times are good. But in bad times the consequence of this profit sharing is that partners are jointly and independently liable for the partnership’s debts .
Corporation:
A corporation is a business entity which is owned by an individual or group of individuals and they run a business that legally exists. A corporate body is formed to regulate and manage business.
People work as a unit in a corporation and produce the value that will generate income. A lot of employment is generated by corporations and they have now a big impact on economic growth and the social development of any country that operates in the free market system.
A corporation has rights and responsibilities just like people have, and can also be liable to the processes of law just as an individual can. The characteristics of a corporation are the limited liability of shareholders, management being delegated to a board of directors, ownership by shareholders, transferable shares and that it has a separate legal personality.
Relevance to Student company
Because of the fact that the student company will sell shares and therefore will be owned by the shareholders, the student company will be a corporation. Big advantage of this legal form is the spreading of the potential business risks because of the large amounts of shareholders. Disadvantages for the entrepreneurs is the limited power within the company because of the “voice” of the shareholders and sharing the possible profit with the shareholders. Within shareholder meetings important decisions or problems will subject and together with the entrepreneurs the business strategies are set.
Contracts with other parties
Because the student company will be a trading company it is very important to make clear arrangements with the suppliers, customers and the entrepreneurs itself. This will split the the risks of the entrepreneurs as well as the business partners in the buying cyclus.
Because it is still not clear what kind of product or service the student company wil sell, this will be researched later on in the market research .