Explain the legal framework for small business?

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

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A business firm can be organized as per different types of legal frameworks. The main types of these frameworks are:

Sole proprietorship: In this his type of firm only one person or individual owns the business or the firm> This owner is also when person with the overall responsibility and authority for management of the firm. This form of business is the oldest and most common form of business organization. It is most suitable for the smallest of the businesses. There is no limitation on the size of business to be carried out by a sole proprietorship. However, it is not very appropriate for very big businesses.

Partnership: Partnership is basically a relationship between two or more persons who loin hands to form and operate a business. The persons who thus collaborate together are called partners of the firm. The partners provide the necessary capital, run the business jointly, and share all the profits as well as losses. A partnership firm is also suitable for small business, but are able to provide satisfactory alternative for businesses that are bigger than those appropriate for sole proprietorship.

Joint Stock Company: Joint stock company is a voluntary association of persons who contribute capital to carry out a particular type of business. People who contribute to this capital are called shareholders of the company. It varies from the partnership firms in several respects. First, a joint stock company has a legal existence independent of its shareholders. Second, the ownership of the company and its management are separated. People who own the company may not necessarily manage it, and usually only some of the shareholders mare involved in management. Finally the liability of the shareholders for the losses incurred by the company is limited by their contribution to its capital. For this reason the joint stock companies are also called limited companies.

There are two broad types of joint stock companies private limited companies and public limited companies. Number of shareholders in a private limited company has an upper limit specified by law. Public limited companies has no such restriction. There are other differences also between them, but we need not go in these right now. Because of limited number of shareholders it can have, a private limited company is generally does not able to form very large capital, and therefore is not very suitable for very big companies. The private limited companies may be used for some small businesses also, bur in general it is more suitable for medium size enterprises.

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