Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

Module 1

Business
Structures and
Legal Compliance
Presented by Harshal Khairnar
 Distinguish between the

01. three most common

types of business
structures

Learn the definition,

Course 02. advantages and

disadvantages of each

Objectives
business structure

Understand the liability,

03. rights, and restrictions of

different structures

Understand how the

04. legal structure of a

company affects the
credit process
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Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

Forms of
Business
Structure
 Summary of Business Structures
Business
structures

Sole Limited Liability

Partnership Corporation Franchises
Proprietorship Companies (LLC)

General Private
companies

Limited Public
companies

Limited Liability Not-for-profit

Partnerships organizations

State owned
Joint Ventures
enterprises

Professional
corporations

Co-operatives
Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

Sole
Proprietorship
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 Sole Proprietorship

Sole Proprietorship

Owned and Indistinguishable Operated in the

managed by one from the owner owner’s name or
person under a trade
name
 Sole Proprietorship

Advantages Disadvantages

Easiest and simplest form of Liability is unlimited (i.e. proprietor is

organization fully personally liable for business
Free of many regulations and obligations)
Capital is limited to what the owner can
formalities of other types of
provide or borrow
ownership
Business is tied to owner. If owner is
Owner retains 100% of after-tax
profits unable to manage due to illness,
business operations could be seriously
disrupted
Owner may not have adequate
knowledge or skills or may lack time to
do things properly
 Examples of Sole Proprietorship
Sole proprietorships are formed for any type of business. The most typical businesses where sole
proprietorships are used are for:

Operating a restaurant Starting a bookkeeping Becoming a freelance Providing housekeeping

business writer services

Providing hardware Offering private tutor Becoming a freelance Operating a local

repair services lessons graphic designer grocery store

And others….
Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

Partnerships
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 Partnerships
Partnerships are similar to sole proprietorships, except it’s where two or more people own the
business. They tend to be more complex in structure versus a sole proprietorship.
The partnership should be governed by a partnership agreement.

Partnership Types

General Limited Limited liability Joint venture

1. General Partnerships (GPs)
All partners manage the business and have unlimited personal liability.

01
Advantages Disadvantages

Better management through Partners are jointly and

more diversified skill set severally liable for all debt
More capital available through obligations of the partnership
distributed ownership Legal action could be taken
Better ability to get credit against partners personally –
because more owners with no separation between the
personal net worth business and the owners
1. General Partnerships (GPs)
The partnership arrangement should be documented in a formal agreement, outlining the terms

01
under which the partnership is formed and is to be operated.

Partnership agreement

Provide for the handling of Might prove to be difficult Slow decision making may
various capital interests in to attract additional result from the fact that
the event of a partner’s partners if existing various partners’ voices
retirement or death agreement creates have to be heard
barriers to entry
2. Limited Partnerships (LPs)

Advantages Disadvantages

Liability is limited only to the General partners are personally

amount of capital contributed liable for business debts
by limited partners More expensive to create than
General partners can raise general partnerships
cash without involving outside Suitable mainly for venture
investors in management of capital, private equity, or
business companies that invest in real
estate
3. Limited Liability Partnerships (LLPs)

Limited liability partnerships

Extension of a All partners are Partner is Liability of other

general protected from personally liable partners is limited
partnership the actions of the for damages to the assets of the
other partners resulting from partnership
fraudulent acts
3. Limited Liability Partnerships (LLPs)

Advantages Disadvantages

All partners have limited Restricted to certain

liability professions such as
Flow-through taxation physicians, attorneys,
status (i.e. income doctors, financial advisors,
generated is treated as and accountants
personal income of the A business owner may not
partners) always be able to create an
LLP
4. Joint Ventures (JVs)

Joint ventures

Pooling the Formed to Governed by Has a limited Sharing of Liability is

resources of complete a joint purpose gross limited to the
two or more one venture revenues joint venture’s
entities particular agreement rather than portion of
(individual or transaction profit debt
corporate)
4. Joint Ventures (JVs)

Advantages Disadvantages

Allows sharing of risks with a It takes time and effort to

venture partner build the right relationship
Can be flexible (for example, a Partnering with another
joint venture can have a business can be
limited life span) challenging
Examples of LLPs and JVs

Limited liability partnerships Joint ventures

Physicians Maruti-Suzuki : Largest Homegrown
Attorneys
Automaker of India, driving mobility
Accountants
Architects since 1982
Licensed financial advisors Bajaj Allianz : Providing insurance to
Doctors 140mn consumers in India since 2001
Veterinarians Tata - Starbucks : One of many JVs of
Undertakers
Tata Group bringing world class
products to India
Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

Corporations
Corporations
Separate legal
entity from the
shareholders

Assets /
Character
liabilities
depends on
acquired or
legislation of the
owed belong
jurisdiction it was
to the
incorporated in
corporation
Corporations

Can be
terminated by
bankruptcy, Has an
merger or indefinite life
voluntary
dissolution
Corporations

Advantages Disadvantages

Greater access to capital than Incorporation can be

expensive
other structures
More formal regulations
E.g. Marketable securities Complex tax rules
(equities or debentures) Corporation has no rights
Liability to shareholders is outside its articles of
restricted to investment incorporation
Profits are taxed in the
company, and corporate tax
rates are often lower than
personal tax rates
Types of Corporations
There are several different types of corporations. The most common are:

1. Private 2. Public 3. Professional

companies companies corporations
1. Private Companies

Shares are closely

held by known
shareholders
Shares are not
available to
general public on
a stock exchange
Private companies

Restricted rights
to transfer shares
01
Board of directors
has authority to
approve or reject
any proposed
Limited number of
shareholders
depending on the
jurisdictions
share transfer
1. Private Companies
Examples:

01
2. Public Companies
Public companies are companies whose shares are traded in a secondary public market. Their shares are
listed on a securities exchange such as:

There is no limit to the number of shareholders.

There are no restrictions on the right to transfer.
2. Public Companies
Examples:
3. Professional Corporates
These professionals can operate through a professional
corporation:

Doctors Lawyers Architects

Engineers Public accountants Physicians

C Corporation vs. S Corporation – U.S. Specific
The terms C Corp and S Corp are commonly used in the U.S.

C Corporation

Stockholders protected – limited

VS S Corporation

Stockholders protected – limited

liability liability
Profits taxed within corporation Profits flow through to personal
as a separate entity tax returns
Allowed to leave profits in Only one class of stock allowed
company Allow no more than 100
Multiple classes of stock allowed stockholders
Limited Liability Companies (LLC) – U.S. Specific
An LLC is a structure where the owners are not personally liable
for any debts or other claims of or against the company.

Profits of LLC

LLC’s are made up of members, which can be:

Individuals Partners Corporations

Member Member Member

Profit distributions flow through to, and are reported on, the
Limited liability (up to capital
members’ individual returns
Flexibility on profit distribution between members
contribution)
Limited liability for the members
Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

Franchises
Franchises
An arrangement in which a seller (franchisor) sells a buyer
(franchisee) the right to sell or distribute products/services made
available through the franchisor, under the franchisor’s brand.
Trademark Marketing

Can be carried out in the form of:

Sole Partnership Corporation

Proprietorship
Operating a Franchise

Advantages Disadvantages
Proven market and established Highly restrictive operating guidelines –
operating procedures franchisor makes all decisions
Training on how to run the business is Personal guarantees provided by the
provided franchisee might have significant impact
Operate under a known name or on credit decisions
trademark Royalties, quotas and other service fees
Requires less working capital than a can negatively impact profitability
similar non-franchise business Inability to set prices may impact ability
to be competitive at a local level
Collateral taken for security depends on
the lessee of a lease agreement
Examples of Franchise
Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

Conclusion
Why should we understand a business structure?

A company’s business structure can have an impact on

the creditor’s lending decisions and the borrower’s
credit application process.

Depending on the business structure, the

property/assets required to secure a loan (collateral)
can be different.
Why should we understand a business structure?

Sole Partnership Corporation

Proprietorship

If the borrower defaults, the When a business applies for a

owner’s assets will be liquidated loan, if the bank decides that
to repay as much of the loan as the business does not have
possible – with no separate adequate collateral to secure
guarantee required. the loan, they might require
personal guarantee.
Credit Risk and Business Structures
The risk associated with different business structures is
also a key consideration when extending credit to a
company.

The size of the loan approved, Some banks or financial

interest rates and fees, terms institutions may be reluctant
and conditions. to give out loans to sole
proprietorships because there
could be a higher default risk.
 Business Structures Summary

Sole Proprietorship Partnership Corporation LLC Franchise

Made up of two or
more people Franchisee has the
Business is its own Made up of members,
Owner not separate Partnership right to sell or
economic entity which can be sole
from business agreement dictates distribute
Profits and losses individuals, partners,
Profits and losses how profits & losses products/services
remain in company – or corporations
Legal form flow directly to owner are distributed made available
distribution to owners Profit distributions
Ends on death of Ends on dissolution through the franchisor,
is through dividends flow through to the
owner of partnership under the franchisor’s
Indefinite life members
agreement or terms brand
within agreement

Partner’s share of
profits and losses All business
All business Profit distributions
reported on personal transactions remain All business
transactions flow are reported on the
tax returns within company transactions remain
Tax issues through personal members’ individual
Partnership Corporate tax return within company
tax return returns
information return is filed
may be required
Module 1 - Risk Management and Compliance - Sem 1 - AY 2025-26

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