Exercises: Types of business and legal structures

By size, businesses are broadly classified into micro-enterprises (fewer than $10$ workers), small businesses ($10$ to $49$), medium-sized businesses ($50$ to $249$), and large enterprises ($250$ or more). Classify: (a) the local greengrocer's, with $2$ employees; (b) the furniture factory in the industrial park, with $120$; (c) a consulting firm with $35$; (d) a supermarket chain with thousands of employees. Explain why size matters (grants, paperwork, bargaining power with banks).

Emma is a self-employed plumber (sole proprietor) and her business owes $\$20,000$ to a supplier. If she cannot pay, she is liable with everything she owns, including her savings and, in the worst case, her home: that is unlimited liability. If the business were a limited liability company (LLC), she would only lose the money invested in the company. Explain the difference between limited and unlimited liability and why an LLC is said to "protect" personal assets.

The figure summarizes the four most common legal structures when setting up a business and their main characteristics. Below is a card with an unsolved practical case.

1. a) Choose the legal structure that fits Emma and explain why (she works alone, takes on low risk, and needs neither partners nor capital).
2. b) Now choose for three friends launching an app, contributing $\$6,000$ between the three of them, who want to risk only that money, not their savings or homes.

When Ana, the self-employed plumber, forms a limited liability company (LLC), a new "person" is born: the company has its own assets, signs contracts and can owe money separately from Ana.

1. a) Explain what it means that a company has its own legal personality.
2. b) Argue why that separates the debts of the business from the personal debts of the owner.

Large companies divide their capital into shares: small pieces of ownership that can be bought and sold.

1. a) Explain what being a shareholder is (owner of a part, entitled to their slice of the profits) and what the difference is between being a shareholder and being the boss.
2. b) Argue why a factory that needs a lot of money may want to sell shares to many people.

The school co-op sells healthy breakfasts during the morning break.

1. a) Explain how decisions are made in a cooperative (in a meeting of all members, each member has one vote, no matter how much money they have) and how the earnings are shared (according to work done or what was agreed, not according to the capital contributed).
2. b) Compare it with a limited liability company (LLC) or corporation where one owner contributes $90\ \%$ of the capital: who calls the shots in each case?

Setting up a business requires paperwork.

1. a) Order from simplest to most complex: registering as a sole proprietor (with the IRS and Social Security), forming a limited liability company (LLC) (filing articles of organization with the state, paying state filing fees, setting up an operating agreement), getting your Social Security card.
2. b) Explain why many small businesses start out as sole proprietorships and only become corporations or LLCs when they grow or the risk increases.

Legal detective: look at the signs or websites of three businesses in your area and find out their legal form (LLC, Inc., Corp., co-op, or just the owner's name).

1. a) Classify them and explain what each set of initials tells you.
2. b) Choose one and argue why you think it chose that form (size, number of partners, risk of the business).

Choose the most appropriate legal form for each case and justify it: (a) Emma, a graphic designer working alone for several clients; (b) three friends with an app who want to risk only the $\$6,000$ they contribute; (c) five workers at a closing workshop who want to buy it together and make decisions in an assembly; (d) a bicycle factory seeking investors who will contribute $\$200,000$ and can sell their shares whenever they want.

To form a limited liability company (LLC), the law now requires a minimum share capital of just $\$1$, but until it reaches $\$3,000$ it imposes restrictions (for example, setting aside part of the profits as reserves); for a corporation (Inc.), it requires $\$60,000$.

1. a) Explain what this initial capital is and who the law protects by requiring it (think about suppliers selling on credit to the business).
2. b) Sara and Leo each contribute $\$2,000$ for their video game studio: can they set up the limited liability company (LLC)? Do they have too much or not enough to reach the $\$3,000$ without restrictions?
3. c) Years later, they want to go public (float on the stock market) to raise large-scale financing: which legal form will they need, and why?

Classify these organizations according to their ownership — private, public, or social (cooperatives and social economy) — and explain what changes in each case (who owns it and for what purpose it operates): (a) the public television channel; (b) the corner grocery store, owned by a family; (c) a farmers' cooperative selling its members' oil; (d) the city hospital; (e) a bicycle factory with $200$ shareholders.

Two friends set up a limited liability company (LLC) fifty-fifty: each contributes $\$1,500$. In the first year they earn $\$4,000$ and decide to distribute half and leave the other half in the company to grow.

1. a) Calculate how much each one receives.
2. b) Explain what advantage leaving profits inside the company has (retained earnings to buy a machine without taking out a loan).
3. c) Argue how the split would change if one had contributed $70\ \%$ and the other $30\ \%$ (the usual practice is to share according to the capital contributed, unless agreed otherwise).

The cousins Emma and Olivia inherit the family bakery. Emma wants to carry on as a sole proprietor in her own name; Olivia proposes a limited liability company (LLC) between the two of them. The business handles debts with suppliers of around $\$25,000$.

1. a) Analyze what each one risks in each option.
2. b) Recommend one form, bearing in mind that there are two partners, that there are debts and that the business is stable, and point out one drawback of your recommendation.

The company 'BikeWest' has accumulated debts of $\$40,000$ and is closing down.

1. a) If it was a sole proprietorship, explain how much the owner can end up losing.
2. b) If it was a limited liability company (LLC) whose owners had contributed $\$5,000$, explain how much they lose at most and what happens to the rest of the debt.
3. c) Argue why the law allows limited liability despite that risk for suppliers (it wants to encourage people to start businesses).

Leo has been a self-employed designer for three years and is doing well: he bills $\$3,000$ a month, has hired an assistant and is going to ask for a loan to set up a studio.

1. a) Point out three signs that he might be better off switching to a limited liability company (LLC) (he has employees, the debts are growing, he is taking on more risks).
2. b) Explain what will hold him back (paperwork, formation costs, more accounting obligations) and what you would recommend to him.

Your class creates a cooperative to sell breakfasts during break for one semester. Design its three basic rules and justify them:

1. a) How people join and leave the cooperative (do they have to contribute money? is it returned when they leave?).
2. b) How the earnings are shared (by hours worked, equally, reinvested?).
3. c) How decisions are made (assembly, one student one vote, simple majority).

Mateo works as a self-employed plumber. He is offered a comprehensive renovation project budgeted at $\$45,000$. To take it on, he needs to take out a bank loan of $\$30,000$ to acquire machinery and a van, as well as hire two laborers. His personal assets include a primary residence valued at $\$140,000$ and $\$12,000$ in savings.

1. a) Design an asset-risk comparison evaluating what would happen if the client goes bankrupt and leaves the project unpaid: contrast the outcome if Mateo remains an individual sole proprietor versus if he first forms a Limited Liability Company (LLC).
2. b) Advise Mateo with a reasoned recommendation: weigh the protection of his home against the greater management obligations, formation costs, and accounting formalities of an LLC for this specific case.

The eight female workers of a bankrupt print shop want to rescue the business by contributing their severance packages. Four of them can contribute $\$15,000$ each (due to having greater seniority), while the other four only have $\$3,000$ each. They are hesitating between establishing a Worker-Owned Cooperative or a Limited Liability Company (LLC).

1. a) Evaluate the distribution of voting power and surplus in both corporate models based on the disparity in contributed capital. Predict what internal tensions may arise in the member meeting or shareholder meeting depending on the formula chosen.
2. b) If the print shop urgently needs external bank financing to renew its machinery, anticipate and justify what specific obstacles or strengths the project will face depending on the legal form adopted.

In a forum on business start-ups, you read the following statement: 'Incorporating a Limited Liability Company (LLC) is always the best option for any business, as it guarantees that you will never be liable with your personal assets and provides more prestige.'

1. a) Critically refute this statement: outline two real-world situations where the supposed asset protection of an LLC proves ineffective (for example, regarding personal bank guarantees or debts owed to the IRS, such as payroll taxes).
2. b) Design two entrepreneurship cases with opposing characteristics (taking into account initial investment, risk, and partners) and justify why for one it is more efficient to start activities as an individual sole proprietor and for the other it is essential to form a company such as an LLC or a corporation.

Three business partners found a video game company as an LLC (limited liability company) with a capital of $\$18,000$: Mara contributes $\$10,000$, Ethan $\$5,000$, and Zoe $\$3,000$. Mara and Ethan have other jobs and do not contribute time, while Zoe works full-time developing the video games. At the end of the year, the company obtains a net profit of $\$24,000$.

1. a) Analyze the distribution of votes and the distribution of dividends that would strictly correspond according to capital shares. Justify why this standard distribution turns out to be unfair to Zoe.
2. b) Design a legal and compensation solution that fairly compensates Zoe's work without infringing upon the ownership rights of Mara and Ethan, differentiating labor compensation from return on capital.
3. c) Suppose that Mara intends to unilaterally approve the full reinvestment of profits into a risky project that Zoe rejects. Determine whether Mara has the necessary majority and formulate a clause or shareholders' agreement that prevents majority abuses.

A business report states: "Cooperatives are an outdated and inoperative formula in today's market, because democratic management slows down decisions and they lack incentives to attract capital."

1. a) Rebut this argument by analyzing the resilience and behavior of cooperatives compared to publicly traded corporations during recessions or sector-wide crises.
2. b) Design a cooperative enterprise project designed to meet an unmet need in a rural area or in a vulnerable neighborhood. Justify the chosen type of cooperative and explain how its founding principles become a competitive advantage over a large corporation.
3. c) Anticipate two financial or operational barriers that this project will face and formulate a strategy to overcome them without distorting its democratic identity.