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SUBMITTED ON: 05.10.2017


I hereby declare that the work reported in this project report entitled Business Entities
and sources of raising Finance submitted at Hidayatullah National Law University,
Raipur is an outcome of my work carried out under the supervision of Dr. Y. Papa Rao. I
have duly acknowledged all the sources from which the ideas and extracts have been
taken. To the best of my understanding, the project is free from any plagiarism issue.

Shraddha Bhagat
Section-B, Roll No-155

I would like to take this opportunity to express my deep sense of gratitude towards my
course teacher, Dr. Y. Papa Rao for giving me constant guidance and encouragement
throughout the course of the project.
I would also like to thank the University for providing me the internet and library

facilities which were indispensable for getting relevant content on the subject, as well as
subscriptions to online databases, which were instrumental in writing relevant text.
And finally I would like to thank my friends for their constant encouragement.

Shraddha Bhagat
Section-B, Roll


i. Declaration..........................................................................................02
ii. Acknowledgement................................................................................03
1. Introduction.........................................................................................05
2. Objective.............................................................................................08

3. Research Methodology........................................................................08
4. Business Entities.................................................................................09
5. Why is studying business entities important?.....................................10
6. What is the difference between a closely-held company and a publicly-held
7. Characteristics of a Good Business Entity...........................................12
8. Types of Business Entities...................................................................12
9. Sources of raising capital.....................................................................20
10. Conclusion............................................................................................24
11. References............................................................................................25

Starting a small business involves many issues. One of the most important is to determine
which form of entity is right for your business. Most people think they need to form a
corporation, but, in fact, there are several alternatives that may be more attractive,
depending upon the type of business you are in. When deciding the form of business
ownership to use, there are two main factors to consider: liability exposure and tax

Liability is the risk that the business will have to pay someone for a business owners
mistake or for debts that the business itself cannot pay. To whom would you be liable and
what is the possible scope of that liability (how much might it cost you to cure the
mistake or pay the bill) depends on multiple circumstances. Some business forms, if
properly used, provide the owners with a shield from liability, so that only the business
assets (and not the owners personal assets) can be reached if there is a judgment against
the business due to a mistake. Corporations, limited partnerships, and limited liability
companies can each provide a shield for personal assets against business debts. There are
requirements that must regularly be met to keep that shield in place, however, and the
costs of forming and maintaining one of those business entities may be more than the
business can afford.
As a result, some businesses prefer to operate as a sole proprietorship or general
partnership. A sole proprietorship, as the name implies, is a business that has only one
owner only one person makes decisions and shares in the profits. A general partnership
is a business in which several owners share management decisions, and share in the
profits (according to their ownership interests).
The start-up costs for these business forms can sometimes be less than for a corporation,
limited partnership, or limited liability company. You should file a fictitious name
registration for your business if you will be using a name other than your given name.
This is filed with the Department of State, and then the filing is advertised in the
Pittsburgh Legal Journal and a newspaper of general circulation, such as the Post-Gazette.
In a sole proprietorship, no management document is required, but in a general
partnership, you may want to consider having an agreement among the general partners
that provides: 1) how decisions will be made; 2) how profits will be shared; 3) whether
interests can be transferred to outsiders; and 4) what happens if a partner dies or becomes
disabled and cannot participate in the business. If you fail to have such an agreement, the
state law will apply, and may impose restrictions to which you may not agree.
Taxes are payable by the owner or general partners on their individual tax returns. In
corporations (unless special S status is sought), the corporation itself pays income tax,
and then the profits distributed to shareholders in the form of dividends are taxed again.

With a sole proprietorship or general partnership, however, you can be fully liable, and
your personal assets seized, to satisfy the liability or debts of the business if the assets of
the business are not enough to pay those debts or satisfy the liability.
That does not necessarily mean that you should never operate a business as a sole
proprietorship or general partnership. You need to evaluate how much potential liability
there is, and whether you can protect against that liability, either because the business will
not enter into contracts beyond its ability to pay, or because you can insure against the
For example, consider where your business will operate. If you are leasing office space,
and the business defaults under the lease, the sole proprietor or general partners could be
fully liable for all damages under the lease. The same is true if you buy an expensive
piece of equipment over time, and then cant make the payments. But, if you are
operating out of your home, and your business does not involve substantial inventory or
equipment, the risk for contractual liability may not be significant.
As to other liability, you can obtain general liability insurance to protect you against
liability for anyone getting hurt on the business property. As to the business you do, and
the mistakes that can occur, consider the worst mistake you could make, and what it
would cost you to fix it. If you are an antique restorer, or jewelry repairperson, the cost of
repairing your mistakes will differ from those of the operator of a catering service, or the
owner of a business specializing in cleaning houses. You need to evaluate your risks, and
determine if you can obtain sufficient insurance to protect you against them. There are
many insurance products available to protect against various risks some you may never
have considered. The issue then becomes whether the cost of the insurance is greater than
the cost of forming a business entity that will provide a liability shield.
If you are comfortable that you can make all your expenses, and insure against all
potential risks at an affordable cost, then you might want to consider operating as a sole
proprietorship or general partnership. Otherwise, you may need to consider a corporation,
limited partnership, or limited liability company, where your personal assets can be
shielded against business liability.
Business entities are an integral part of business practices and economic productivity. An
effective business practitioner must understand the characteristics of the major types of

business entities, as these attributes can affect the nature of the business's relationships. It
will introduce the concept of business entity, legal authority of business entities, and
justification for their legal recognition. It will then introduce the most common types of
business entities and their characteristics.

The objective of the project is to present a detailed study of the "Business entities and
sources of raising finance".
To study the characteristics of business entities.
To study the types of business entities. And its advantages and disadvantages.

To study various sources of raising finance.

This research is descriptive and analytical in nature. Secondary and Electronic resources
have been largely used to gather information and data about the topic. Books and other
reference as guided by Faculty have been primarily helpful in giving this project a firm
structure. Websites and dictionaries have also been referred.

Business entities are legal organizations that exist by virtue of state law. One way to view
a business entity is as a separate person. The business entity carries on business activity
on its own behalf. The owners of the business entity are representatives of the entity.
Business entities benefit society by allowing individuals to aggregate their resources and
efforts in furtherance of a business activity. The legal entity is essentially a bundle of
contracts that provides for the rights and duties of the owners and employees of the

business entity. Each individual state passes its own substantive and procedural laws
regarding business entities. A business must choose its state of formation or organization.
The home state may be the location where the business is headquartered or it may be any
other state where the business organizes and establishes a registered agent. If the business
wishes to carry on business outside of its home state, it must qualify to do business and
register as a foreign entity doing business in the other state. Carrying on business is
generally defined pretty broadly to include marketing or sales activity. A business may
carry on the majority or all of its business in a state or states where it is registered as a
foreign entity. The business entity must comply with the laws of any state in which it
does business.
Example: I want to form a business entity in my home state of New York. The rules
prescribed by New York will govern the formation process. I want to also carry on
business in Pennsylvania. To do so, I will register my business in New York and then
register as a foreign entity doing business in Pennsylvania.

Why is studying business entities important?

Owners and managers of a business seek to organize their resources to maximize
productivity and opportunities. These individuals must understand the important
characteristics of the business entity to take advantage of all of the benefits associated
with carrying on a business activity as a legal entity. Taking advantage of a business
entity status means choosing an entity form for your business, operating within your
chosen entity form, and undertaking business transactions with various entity types.

Understanding business entity characteristics includes familiarizing ones self with the
ownership structure, organizational structure, potential liability, compensation methods,
and tax laws applicable to the business entity. Lastly, the owners and managers of a
business must comply with the procedural and substantive laws applicable to that
business entity. This is generally known as business governance.

Note: Numerous other requirements may exist before a business entity may carry on
business in a jurisdiction. For example, He/She will likely have to obtain a business
license from the local government before undertaking business. He/She will have to do a
fictitious name filing if she operates under a name other than her own name. Further,
He/she will need to set up an employer identification number (EIN) if she plans to have
employees for her business. All of this is distinct from the nature and characteristics of
the business entity.

What is the difference between a closely-held company and a publicly-held


Business entities are often categorized as either closely-held or publicly-held. These

designations are not separate types of business entity; rather, they are classifications or
defining characteristics of a given business. Generally, the distinction between the two
classifications concerns the number of business owners and whether the equity ownership

is sold on a public exchange.

Closely-held Business A closely-held business, as the name implies, is held by a

smaller or more closely related group of individuals. It is often thought of as a smaller
business, such as a mom-and-pop or family business. In truth, however, the closely-held
status has little to do with the size or revenue of the business; rather, it simply means that
the business is not widely owned by numerous, unrelated people. Another characteristic
of the closely-held entity is that it is not traded on a public market.

Example: Husband, Wife and three friends own a business that specializes in dog training
and boarding. They are a closely-held business because all of the ownership is held by a
small group of closely-connect individuals.

Publicly-held Business A publicly traded business is any business that is traded on a

public exchange. This means that the company has gone through an initial public offering
in which its shares were registered with the Securities and Exchange Commission and
subsequently listed for sale to the public at large. A publicly-held or publicly-traded
company is generally held, or capable of being held, by a large number of unrelated

Example: Eltons business is growing rapidly. He needs to bring in additional capital to

expand operations. He decides to undertake a public offering and list shares of his
company for sale on a public exchange. Once listed for sale to the public, Eltons
business is now a publicly-traded company.

Note: A closely-held business is a private business. It is unlikely that a business could or

would undertake a public offering and remain closely held. The inverse, however, is not
necessarily true. Private business entities are not necessarily closely held. Some private
businesses are widely held by a large number of shareholders.

Characteristics of a Good Business Entity

1. Creation & Maintenance The effort associated with forming and maintaining the


2. Continuity The continuity or stability of the organization upon given occurrences;

3. Ownership & Control The ownership rights and control of those involved with the

4. Personal Liability The potential for personal liability of those involved with the

5. Compensation The compensation and division of profits among business owners;


6. Taxation The taxation of the organizations earnings and its distributions of profits
to the owners

7. Before you start a business, you need to choose the type of business entity that
perfectly suits your requirements and the kind of business you are planning to start.

Types of Business Entities:

1. Sole Proprietorship
2. Partnership
3. Limited Liability Company (LLC)
4. Corporation

Sole Proprietorship
This is the simplest way to set up a business. In a sole proprietorship, one owner makes
all the business decisions and earns all the profits. The owner is personally responsible
for all of the debts and obligations incurred by the businesshe or she has unlimited
liability. It is likely that sole proprietorships are a large potential market for you. Their
insurance needs are very similar to those of individuals and families. Youll find that
owners of this type of business tend to be very approachable. They are used to relying on
outside advisors to help with many areas of their business, and they will often welcome

your input.

The main feature of a sole proprietorship is that the business itself is not a separate legal
entity from the owner of the business. Legally, the owners personal and business
financial matters are indistinguishable. You will find that if you are comfortable working
with the family market, you will be comfortable working with sole proprietors. Their
needs are very similar. Business liquidation and family retention of the business are
important issues for this group. For example, many business owners in this group think it
would be a good idea to pass the business on to offspring who work with them. However,
very few take steps to make their wishes a reality. When working with sole proprietors, it
is always good idea to help them understand that they can have say in what happens to
their businessand that you can help make sure their wishes are followed.

Advantages of Sole Proprietorship

There is no cost of the establishment as you can work from anywhere if your
business is not registered.
No tax liability
The cost of forming such a business is zero.


All the risks and liabilities are borne by the owner of the business.
No legal protection for the business.
Investors and creditors are able to collect their dues against the person or business
property of the owner.
Getting loans is not easy.

A partnership is more complicated than a sole proprietorship both to establish and to run.
To begin, a partnership involves an agreement between two or more people carrying on a
business with a view to making a profit. There are built in strengths to a partnershipthe
pooled assets of the partners, for exampleas well as built-in weaknesses (i.e. if
anything happens to one partner, the viability of the business can be called into question).

There are two kinds partnership to remember:

General Partnership: Two or more owners share the management of a business. Each is
personally liable for all the debts and obligations of the business. Each partner is
responsible for, and must assume the consequences of, the actions of the other partner(s).

Limited Partnership: The partners combine only capital. They are not involved in
managing the business and cannot be held liable for more than the amount of capital they
contribute. This is known as limited liability.

A few additional characteristics of partnerships include: A written agreement forming and

defining the partnership is preferable, but it is not legally necessary. However, the
partnership name must be registered. In a general partnership, all partners are fully liable
for all expenses and debts of the partnership. The liability goes beyond contributed cash
or other assets to include all personal assets as well. The partnership itself pays no taxes.
An information return that details the income, expenses and profits of the partnership
must be filed each year. The profits are allocated proportionately among the partners, who
report income on their own personal income tax returns. Individual partners can make
legal commitments that are binding on all the partners.

Advantages of LP

Less paperwork and formalities than a corporation

An LP is not liable to be taxed but individual partners have to file expenses in
their personal income tax returns.
A partner is only liable for his own debt equal to the amount he invested in the

The limited partners do not have any role in the management and decision-making
The limited partner can leave anytime without dissolving the partnership.
This is a kind of investment opportunity.

The general partners are liable for all the risks, dues and debts of the company, as
well as for the consequences of their decisions.
It is necessary to create a partnership agreement to define the roles of the limited
partners in the company.
It may be essential to hold annual meetings for all the partners.
Advantages of LLP

A business partner is not responsible for the wrong/illicit activities of other

An LLP is a tax pass-through entity, that means all the tax liability are divided
among the partners of the business.
Registration of LLP is cheaper.
There are fewer rules associated with it.
It is comparatively easier to exit an LLP partnership.
No upper-limit on the number of partners.

Disadvantages of LLP

Requires minimum two partners.

Fundraising options are limited.
Less business credibility
In some countries, LLP can only be formed by professional service providers
including lawyers, accountants, and doctors.
Limited Liability Company

A limited liability company, or LLC, blends elements of the corporate structure with
aspects of a partnership. An LLC offers the liability protection of a corporation with the
flexibility and tax features of a partnership. An LLCs owners are known as members.
The LLC itself is a separate legal entity, which protects the members from personal
liability for business debts. But an LLCs profits are not taxable to the company. Those
profits pass through to the members, who are personally responsible for income tax.
Thus, unlike with a corporation, an LLCs profits are only taxed once.


It is a better alternative to LP, as it doesnt involve any personal liability to

business owners.
It is inexpensive to form.
LLC is owned by all the partners, and they can decide on how business profits,
losses, shares, and management responsibilities will be shared.
These are usually good for real estate partnerships.

No or less prospect of investors

Doesnt work for a complex business structure.
As one of LLC partners, you cannot pay yourself for the work.


A corporation is the top type of business entity. It is usually owned by the company
shareholders and managed by a board of directors, which is also formed by the
shareholders. The board is responsible for making all the important business decisions
and firing/hiring officers in the company. The corporation is generally divided based
upon its tax status as C-Corporation, S-Corporation, and non-profit Corporation.

Some of the less-common types of business entity are the limited liability limited
partnership (LLLP) and the professional corporation (PC). The LLLP is a special purpose
entity generally used as part of special project, such as a real estate project. A professional
corporation is a corporate form for small practitioner firms that is rarely used because of
the unfavorable 25% flat corporate tax rate.
C-Corporation:In its simplest form, the corporate organizational structure consists of the
following levels:

Shareholders: who own shares of the business but do not contribute to the direct
management of the corporation, other than by electing the directors of the corporation
and voting on major corporate issues.
Directors: who may be shareholders, but as directors do not own any of the
business. They are responsible, jointly as members of the board of directors of the
corporation, for making the major business decisions of the corporation, including
appointing the officers of the corporation.
Officers: who may be shareholders and/or directors, but, as officers, do not own
any of the business. Officers (generally the president, vice president, secretary, and
treasurer) are responsible for day-to-day operation of the corporate business.

S-Corporation: The S-corporation is a certain type of corporation that is available for

specific tax purposes. It is a creation of the Internal Revenue Service. S-corporation status
is not relevant to state corporation laws. Its purpose is to allow small corporations to
choose to be taxed, at the Federal level, like a partnership, but also to enjoy many of the
benefits of a corporation. It is, in many respects, similar to a limited liability company.
The main difference lies in the rules that a company needs to meet in order to qualify as
an S-corporation under Federal law.

Advantages of a Corporation

The ownership is transferable based on who has the most shares at a given time.
It gives you the ability to make public stock offerings and acquire capital.
Generally, business shareholders and employees are not liable for the companys

debts and obligations, while shareholders will only lose their own investment if the
business ever fails.
Well-established business structure with roles and responsibilities clearly defined.
The organization employees can receive stock benefits.

Expensive to form and manage.

More paperwork and time-consuming.
Shareholders can only hire/fire the managers and officers but have no direct
control in the managerial process.
Tax is charged on the corporation as well as on the individual salaries of the
shareholders, thus causing double taxation.

Types of
Business Sole (SP) General
Limited (LP) Limited (LLC)
Entities and Proprietors (GP) C-Corp S-Corp
Partnership Liability Company
Characteristic hip Partnership
One Owner 2+ Owners 2+ Owners Any number of Any number of Limited to 35
Definition &
Ownership No Organization who share At least one general Members; must be Owners/Shareholders Owners
Profits & partner & one registered w/state (NM) Shareholders
Liabilities limited partner; must MAY not be able to have
be registered with only one owner and Must be incorporated by Must be both
state. partnership taxation. state. incorporated wi
state and meet I

Sole owner Partners manage General partners Owners/Members Board of Directors/ Board of Direct
Management manages and
& manage. Limited May manage or in Officers manage. Officers manage
Governance and governs govern together. partners prohibited Articles of Organization Shareholders elect Shareholders ele
Functions may be from involvement in or Operating Agreement Board of Directors. Board of Direct
divided in a most types of may delegate to
partnership management. managers.

None May have a Limited partnership Articles of Organization Articles of Articles

Governing Incorporation
written or oral agreement (Must be filed w/state); Incorporation (Must be
Documents partnership operating agreement filed w/state): Bylaws. be filed w/state)
agreement, but By-laws
can have

No limitation on No limitation on Limited Owners/Members have Shareholders have limited Shareholders ha

Liability of liability. liability. partnerships/limited limited liability. liability. limited liability
Owners liability; general
partners no limited

Owners Income Partnership Partnership Income Taxed as partnership (i.e. Double taxation (corp. Shareholders ta
Tax taxed to partners; Members taxed Co.
taxed to him/her Income taxed to taxed on corp. Income; as partners
Treatment partners; NOT to NOT to partnership, not taxed) IF certain shareholders taxed on corporation me
partnership Flow Flow conditions met; otherwise dividends. and continues
Through Through Taxation. taxed as a a meet I
Taxation C corporation. standards


Capital is to business what nutrition is to life. Whether it is about starting a business or
expanding an already existing business, "stage appropriate" funding is always a good
thing, because capital can be used in tandem with growth. You could have the best of
ideas, plans and people, but without capital, none of the dreams will come true. Though
ways to raise capital is often seen as a challenge, it need not be as tricky or difficult a
situation as it is made out to be. As an entrepreneur you have many options when it
comes to ways to raise capital diverse sources and investors.
A business firm can raise funds from two main sources:

(a) Owned funds, and

(b) Borrowed funds.

Owned funds refer to the funds provided by the owners. In a sole proprietorship, the

proprietor himself provides the owned fund from his personal property. In a partnership

firm, the funds contributed by partners as capital are called owned funds. In a joint stock

company, funds raised through the issue of shares and reinvestment or earnings are the

owned funds.

Borrowed funds refer to the borrowings of a business firm. In a company, borrowed funds
consist of the finance raised from debenture holders, public deposits, financial institutions
and commercial banks
A company might raise new funds from the following sources:
The capital markets:
i) new share issues, for example, by companies acquiring a stock market listing for the
first time
ii) rights issues
Loan stock
Retained earnings
Bank borrowing
Government sources
Business expansion scheme fund
Venture capital


Option one when it comes to ways to raise capital is using your own savings or your
credit cards. When you have money of your own, why look at external sources? But
before you opt for this, make sure you have a good talk with subject matter experts, look
into the long-term consequences, and decide which form of equity fund is the best way
for raising capital via equity. You could have savings, mutual funds, life insurance or
credit cards (the last being the most risky funding option), so when you use the funds for

your business venture you will need to understand which of the options have scope of
bringing in better returns on investment.
When your own funding is not an option, there is another great way to raise capital
friends and relatives. Though it may seem shameful to ask them for capital, it seems to be
quite a popular option because according to a survey it is the option of choice for 30% of
entrepreneurs who are looking for ways to raise capital. If you decide to go this way for
funding, you must have your attorney draw up a business contract because though you
approach people you know for funds in an informal, non-business way, business is best
done transparent, telling them how their investment will profit and ensuring that you will
keep up your part of the agreement is the most professional way to do business.
Private investors are those who are interested in making money with their capital through
non-traditional markets. These angels could be anyone someone you know, your
banker, your attorney, like-minded individuals, or an individuals who for the love of
business, seek out new opportunities to invest in return for equity ownership. These
people can give you ways to raise capital, guidance for start-ups, improve your ideas and
mould your business, but they usually demand high returns for their investments.

The next option for ways to raise capital are venture capitalists who provide funds to your
company if your business can prove that it has a solid track record and a potential return
on investment. Make sure you find a venture capital firm that has similar goals and ideals
as yours. Ensure that you have a risk management plan, the foresight to predict where you
see your company down the line, and do consider all possible contingencies.
Remember, venture capitalists do not in start-up companies and they invest in people, not
just companies.
A good place to look for while looking for ways to raise capital is your office your own
employees. If you have a committed workforce that really believes in the organisational
goals, then you might even find an employee who would help you financing and become

a potential investor. If your potential or current employee is likely to become your
investor, you get a really committed workforce that is driven by reasons other than the
Before going public with your company, you should consider all the possible risks while
looking at ways to raise capital. Capital equity is more risky than any other type of
funding. There are tons of legal points that surround this project, especially if its for
budding business enterprises. Public equity involves a great amount of stress in terms of
running the company and a considerable loss of control. The advice of a knowledgeable
attorney is absolutely essential. Its good to take a consultation before deciding on ways
to raise capital, or discussing it while choosing the option.
Who do you turn to when theres no one to turn to Banks! Yes, as the least expensive
route to get funds, banks are your answer on ways to raise capital for business. With as
less as 2 percent, starting a business is simpler than ever before. There is also a great deal
of documentation and paperwork to be done. However, as an entrepreneur you will have
to have a clean state credit history to get a loan. Different banks might have different
parameters to offer loans. You have the choice of a secured loan or an unsecured loan
the difference being you having to pledge your assets Vs. you paying lesser interest.
Alternatively, you could also look at money brokers who deal in circulation of funds
between investors and entrepreneurs. Money brokers act as a bridge in financing and can
almost always guarantee that you get the amount of money you want/need, for a
percentage of the gross amount that is their fee. The retainer fee is always paid up-front,
so be ready for that. No isnt that an easy way to raise capital?


Yes, obtaining capital is the first and foremost concern when it comes to taking your
business to the next level. But an equally important challenge is to have a way to raise
capital that isnt very heavy on the pocket and puts the capital to use such that you are
able to maximize return on invested capital. So before you act, deliberate on the ways to
raise capital best suited for your business, make sure you budget right, adhere to the

timelines, analyze the method of investment, formulate a backup plan, buffer for
contingencies and garner more value from your investment.

Embarking on a business venture involves many critical decisions. The form of entity in
which to conduct the enterprise ranks among the most important. Careful thought at the
outset should result in the selection of a form of organization that not only best suits the
needs of the business and its owners, but by its inherent attributes contributes to the
success and growth of the enterprise.
Selecting a business entity can be a complex decision with long-term effects on the
ownership, owner liability and taxation of a business. Once you have prepared a business
plan and evaluated your business ownership goals seek the advice of trusted financial
professionals in finalizing your business entity selection.
Companies need to raise their capitals in order to support its projects. There are several

ways for raising that amount of cash. Raising it from the equity market as issuing shares,
and from the bond market as issuing bonds are the most common ways to do so and there
are processes to be followed when using these methods to raise the capital of a company.
Companies need to evaluate their Cost of Capital in order to improve their performance
and increase their return to avoid shareholders selling their shares, which will negatively
affect the company's share price and the increase in the cost of dept to the lenders due to
the higher risk they are taking. Therefore, companies use CAPM as the standard formula
for estimating the cost of equity capital for their evaluation.