Many entrepreneurs are confused about which company to set up when establishing their own business. In order to choose the right legal entity, entrepreneurs should know the advantages and disadvantages that each of the following six legal entities has to offer so that they can choose the type of company that best aligns with the nature of their business.
Sole proprietorship companies:
Comprising a few people who trust each other’s abilities and competencies, including:
General Partnership company
A General partnership company is a company comprising two or more natural persons, who assume joint responsibility to the full extent of their assets for the company’s obligations. The company’s name may consist of the name of all partners or may be limited to the name of one or more partners followed by “and his partners”. The company may have a unique trade name, provided that it is accompanied by what indicates that the company is a general partnership.
The advantages of general partnership companies:
- Enabling a number of experts to cofound the company, each within his field of expertise
- Participation of more than one person in decision making when it comes to the company’s activities, ensuring decisions are rational as opposed to a sole proprietorship company.
- Each partner may contribute to the company’s capital an amount within his financial means as opposed to a company funded by one individual.
- The company has easy access to bank loans and supplier credits.
Disadvantages of general partnerships companies:
- The extensive risks arising from the absolute responsibility of each partner.
- Insufficient flexibility that sole proprietorship enjoy.
- The company’s capital is limited to the partners’ financial means.
- The death, withdrawal or disqualification of a partner may result in the company’s closure, and problems may be arise with the heirs of a deceased partner, the withdrawing partner or the trustee regarding the assessment of his rights upon the company’s termination.
Thus, we note that general partnership companies are not suitable for relatively diversified businesses.
Simple Partnership Company
The simple partnership company consists of two categories of partners:
One of them (one or more partners) is an active partner and is liable for the company’s obligations and debts as in the general partnership companies.
The second category is referred to as limited partners including (one or more partners) who contribute only assets and are prohibited from participating in management. They shall be liable only up to the extent of their contributions. Their names shall not appear in the name of the company, and they shall not participate in the company’s management, but their role shall be limited to supervising its activity. The Law has prohibited partners from participating in management activities even under a power of attorney. However, this prohibition is limited to external management rather than internal management, where the limited partner is entitled to work as a regular employee or a company manager but has no relationship with third parties.
The name of the simple partnership company consists of the name of all or one of the active partners followed by “and his partners”, without including the name of any limited partners. If the limited partner includes his name in the company’s name; then, he is jointly liable for the company’s debts against third parties.
The advantages of simple partnership companies:
- Capital can be increased by including a large number of limited partners, who do not want to risk more than their respective share in the capital.
- Banks and suppliers have increased confidence in the company, granting it loans or and credit facilities to expand its activities.
The disadvantages of simple partnership companies:
- The company faces the same above-mentioned problems faced by partners of general partnership companies.
- The shares of the limited partners are non-tradable and may be sold to third parties only after the approval of all partners.
This type of company is appropriate for businesses that require a relatively large capital.
The joint venture company
The joint venture company is a shelf company, which is not a legal person, does not exist for third parties and its effects are limited to the partners only.
The advantages of the joint venture company:
- Unlike other companies, a joint venture is a temporary entity established for a specific purpose or more than one tasks that do not take long to implement.
Associations of capital:
These companies are established for financial considerations, and the partner’s personality has no impact on the company. Joint ventures include:
A shareholding company is a company whose capital is divided into tradable shares that are equal in value, and offered for public subscription. Shareholders shall not be liable for the company’s debts and liabilities except to the extent of the value of their shares. The number of founders or shareholders shall not be less than five persons. The founders shall subscribe to shares of the capital that represent no less than 20% and not more than 60% of the capital. No founder may subscribe to more than the percentage determined in the articles of association of the company. Each shareholding company shall have a name indicating its purpose. The name shall be different than that ofthe natural person unless the company’s purpose is to use a patented invention registered in the name of that person or if the company acquired a commercial establishment and used its name. In all cases, the name of the company must include the phrase (A Qatari Shareholding company). The capital of the shareholding company, which offer its shares for public subscription, shall not be less than ten million Qatari Riyals.
The advantages of a shareholding company:
- The management of a shareholding company is concentrated in the hands of the shareholders in the form of general assemblies.
- One of the broadest forms of private enterprises prevalent in capitalist societies.
- Well reputed with easy access to loans and credit facilities.
- The ability to hire high paid experts.
- Allocating work based on expertise and the nature of activities.
- Its life cycle is not affected by the lives of its capital owners.
The disadvantages of a shareholding company:
Although a shareholding company offers numerous advantages, there are some obstacles to its prosperity:
- The company requires large expenses at the time of its incorporation until its establishment and operation.
- Interruption of the relationship between the shareholders and company’s management due to the separation between ownership and management.
- The transformation of the company’s activity takes a long time and many procedures.
The following companies combine the characteristics of Sole proprietorship companies and financial institutions.
Limited Liability Company
A limited liability company consists of two or more partners, up to a maximum of 50 partners. A minimum of three partners is required. The capital is divided into equal shares. The company is managed by one or more partners. Its management can be entrusted to third parties; The partners can exercise their right to control the management of the company through a supervisory board comprising at least three partners.
The Advantages of a limited liability company:
- Easy formation procedures.
- Partners are responsible only to the extent of their shares in the capital.
- Engagement is limited to natural persons excluding legal persons.
The disadvantages of a limited liability company:
- These companies cannot offer their capital for public subscription.
- Such companies are prohibited from carrying out bank business, saving or insurance.
A Partnership Limited by Shares
A partnership limited by shares consists of one or more active partners and other shareholders. Each of them has a share in the capital in the form of equal and tradable shares without the need of the approval of other partners. The active partners shall not be permitted to interfere in the management. However, their role is limited to controlling the company’s activity. They shall not be responsible for the debts of the company except to the extent of their shares in the capital.
The advantages of partnerships limited by shares:
- The capital can be increased significantly compared to other types of Sole proprietorship companies.
- Attracting the junior investor to purchase the relevant number of shares without restrictions or conditions.
- The procedures required to form the company are simple and uncomplicated.
The disadvantages of partnerships limited by shares:
- The businesses of such companies cannot be expanded without limits since shareholders need to have confidence in the active partners to manage the enterprise.
- The easy incorporation procedures lure some people into establishing this type of companies to exploit the shareholders’ funds without moral imperative.
Hence, in many societies, partnerships limited by shares have been reduced and replaced by shareholding companies.