Legal Structures in Businesses

Businesses not only vary in size and industry but also in their ownership. Most businesses evolve from being owned by just one person to a small group of people and eventually being managed by a large number of shareholders. Different ownership structures overlap with different legal forms that a business can take. A business’s legal and ownership structure determines many of its legal responsibilities.

Legal structures for multinational companies the advent of the information age and globalization the traditional hierarchy of the industrial age is rapidly disappearing and new large groups that are spread across the globe are fast emerging a multinational corporation is a company with headquarters in one country but they operate in many countries the post-second

World war period saw the rapid growth of multinationals in europe america and japan as the world economy is opening up with a fall and regulatory barriers to foreign investment better transport and communications freer capital movements etc international companies are finding it easier to invest where they choose to cheaply and with less risk with globalization

Companies are expanding to international markets and establishing marketing manufacturing or research and development facilities in several foreign countries for this they need a unique legal framework this chapter will focus on the legal structures for these multinational companies what are multinational companies a multinational company generally has offices

Or factories in different countries an a centralized head office where they coordinate global management a multinational company also called mnc is a corporate organization that owns or controls the production of goods or services in at least one country other than its home country one of the first multinational business organizations the east india company was

Established in 1601. after the east india company came the dutch east india company in 1603 which would become the largest company in the world for nearly 200 years some current examples are big multinational companies like apple google amazon coca-cola starbucks ibm fedex accenture samsung or general electric etc nestle and shell oil are two examples of european

Multinationals most of the largest and most influential companies of the modern age are publicly traded multinational corporations including forbes global 2000 companies what are conglomerates a conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate group usually involving a parent company

And many subsidiaries often a conglomerate is a multi-industry company conglomerates are large corporations and are multinational this image is a very good example of some well-known conglomerates you can note that each of these conglomerates is made up of different businesses that operate in various industries or sectors that are often unrelated the parent

Companies like nestle pand pepsico kellogg’s etc hold stakes in various smaller companies that choose to conduct or manage their business separately you will also note that this is done predominantly to avoid the risk of being in a single market and thereby take advantage of diversification features of mncs and conglomerates some of the attributes associated with

These large multinational corporations are highlighted here these multinational groups operate across the boundaries of nations they employ and serve thousands of people from different cultures their annual sales turnover is in billions of dollars they raise money in different stock markets in spite of all these diversities they may be part of the same global

Group these companies operate as individual entities in different countries or markets and consolidate with the group domestic corporations are taxed on their worldwide income at the federal country or state levels compliance without overpaying makes the products and services of these conglomerates more competitive earnings more attractive to investors and

Company a more responsible corporate citizen evolution of legal structures for mncs and conglomerates these mncs are dynamic organizations that are constantly changing and evolving acquiring and merging many companies opening their offices in all parts of the world and operating under the ambit of ever-changing complex organizational structures fundamentally

A corporation must be legally domiciled in a particular country and engage in other countries through foreign direct investment and the creation of foreign branches or foreign subsidiaries multinational corporations can select from a variety of jurisdictions for various subsidiaries but the ultimate parent company can select a single legal domicile all these

Large groups have smaller companies within them the conglomerate may be constituted of different units which may represent separate legal entities constituted in different countries having multiple layers of ownership which might be added to the group through mergers acquisitions or could be joint ventures now let us look at the operational structure for these

Mncs global operations of these corporations are conducted with multiple subsidiaries branch offices and joint venture partners working together constantly evolving and changing their legal structures through mergers acquisitions and takeovers these subsidiaries and partners are responsible for their own financials and local country reporting they have their own

Fixed assets held for the purpose of producing or providing goods or services and they operate in their own local markets where they’re self-produced or their group concerns products are sold and eventually all these units consolidate their financials with the group multinational corporations may be subject to the laws and regulations of both their domicile and

The additional jurisdictions where they are engaged in business in some cases the jurisdiction can help to avoid burdensome laws corporations can legally engage in tax avoidance through their choice of jurisdiction but must be careful to avoid illegal tax evasion these mncs should comply fully with all statutory and tax laws and regulations around the world and

Ensure payment of the correct amount of taxes in every country where it operates aside from setting up a private limited company as a subsidiary foreign companies have two other options for entering the foreign market a branch office or a representative office both are registered locally in the country of operations follow local procedures and need to pay official

Fees for registration let us learn about these two business structures concept of representative office a representative office is the easiest option for a company planning to start its operations in a foreign country as its name says a representative office represents its foreign parent in the country of operations the company need not incorporate a separate

Legal entity nor trigger corporate income tax as long as the activities are limited in nature generally in a foreign country we’re a branch office or subsidiary is not warranted representative offices are generally easier to establish than a branch or subsidiary as they are not used for actual business that is sales or revenue generation a representative office is

An office established by a company to conduct marketing and other non-transactional operations a representative office cannot regularly buy and sell goods or offer services therefore there is less incentive for them to be regulated a representative office is a more tentative step into the foreign market often used by investors to test the waters or for promotional

Purposes when the business distributes its goods by other means a representative office is most appropriate in the early stages of a corporation’s business presence in a foreign country they have been used extensively by foreign investors in emerging markets such as china india and vietnam remember a representative office does have restrictions as it is not being

Able to invoice locally for goods or services main features of representative office representative office to engage only in activities which do not amount to or form part of the carrying on of the relevant business in a foreign country having a nominated person employed by a local affiliate to handle inquiries could fall into this category the representative office

Can contact customers and enter into contracts on behalf of its foreign parent but can’t sell the goods itself representative offices tend to be utilized by foreign investors in fields such as sourcing of products quality control and general liaison activities between the head office and the representative offices overseas corporations should periodically review

The suitability of the structure and its activities to make sure that the company is not triggering a taxable presence in the foreign land by exceeding the permissible activities a good example of a representative office is isoci bank which is india’s second largest bank it recently opened representative offices in three east asian countries thailand indonesia

And malaysia the branches are expected to enable the bank to increase its participation in india’s trade transactions in the region it also has a representative office in the u.s as the business grows the company may want to transition to a branch structure as branches are allowed to conduct a much broader range of activity than representative offices a company

Expands its business by opening up its branch offices in various parts of the country as well as in other countries a branch office refers to an establishment that carries on substantially the same business and activity as is carried out by its head office the foreign branch of a company refers to the branch of a company that operates in a foreign country it is

A branch of a company operating outside the country of its registration it does not require opening a separate legal entity in the country of operations the branch is legally part of the company and is not a separate entity secondly the range of the activities that can be undertaken substantially increases as compared to a representative office branches can buy

And sell goods sign contracts build things render services and generally everything that a regular business can do branches generally constitute a taxable presence in a foreign country and must account for and file prescribed returns with the local authorities the foreign branches may be subject to special tax considerations a subsidiary of a foreign corporation

Generally is taxed as any other domestic corporation that is as a separate taxable entity apart from its foreign parent in contrast a branch of a foreign corporation is not treated as a separate taxable entity instead the code and regulations employ a set of special rules to determine the tax liability of the branch both in domestic country and foreign country of

Operations attributing the profits to the branch activities require arms length transaction such branch offices help the company in various ways first by spreading its business to diverse locations and thus increasing the customer base second by expanding the size of the market for a company’s product by attracting more customers it helps bringing its product

Closer to the customers by increasing their accessibility to it making the distribution and marketing of its goods and services easier and more effective widening the scope of its trading and manufacturing activities bringing more opportunities and opening on explored avenues overall help fuel the growth of the company and enhance its profitability subsidiaries

Are a common feature of business life and all multinational corporations organize their operations in this way the first feature is that subsidiary is owned by other companies subsidiary is a company that is completely or partly owned by another corporation that corporation owns more than half of the subsidiary stock and normally acts as a holding corporation

Holding corporation at least partly or wholly controls the activities and policies of the daughter corporation the controlling entity is called its parent company parent or holding company a subsidiary may itself have subsidiaries and these in turn may have subsidiaries of their own a parent in all its subsidiaries together are called a group a parent company

May own one or more subsidiaries in which case each of its subsidiaries is known as sister companies to one another although this term group can also apply to cooperating companies in their subsidiaries with varying degrees of shared ownership examples include holding companies such as berkshire hathaway time warner or citigroup as well as more focused companies

Such as ibm or xerox these and other mncs organize their businesses into national and functional subsidiaries often with multiple levels of subsidiaries secondly they are distinct legal entities subsidiaries are separate distinct legal entities for the purposes of taxation regulation and liability for this reason they differ from divisions which are businesses

Fully integrated within the main company and not legally or otherwise distinct from it a subsidiary can sue and be sued separately from its parent and its obligations will not normally be the obligations of its parent if a parent company owns a foreign subsidiary the company under which the subsidiary is incorporated must follow the laws of the country where the

Subsidiary operates and the parent company still carries the foreign subsidiaries financials on its books known as consolidated financial statements of the group what do we mean by foreign subsidiary in subsidiary structure the inbound company incorporates a wholly owned subsidiary in the foreign country making it a distinct legal entity separate from the parent

Company subsidiary incorporated by a foreign company generally is not subject to specific restrictions or limitations with respect to its activities other than the general limitations applicable to domestic entities as well the profits earned by a foreign subsidiary are liable to taxes for the local laws and regulations of the country of operation the walt disney

Company has more than 50 subsidiaries and some of them are shown in the example for making the concept easier to understand a joint venture jv is a business agreement in which the parties agree to develop for a finite time a new entity and new assets by contributing equity they exercise control over the enterprise and consequently share revenues expenses and assets

A joint venture is any combination of two or more enterprises associated for accomplishing a common business objective if two unrelated incorporated or unincorporated businesses agree to carry business as a non-corporate joint venture the venture is normally considered as partnership limited in scope or duration if two entities form a corporation to carry out a

Specific business activity then such an associated is known as corporate joint venture data joint venture takes place when two or more parties come together to take on one project in a joint venture all parties are equally invested in the project in terms of money time and effort to build on the original concept while joint ventures are generally small projects

Major corporations also use this method in order to diversify a joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations since the cost of starting new projects is generally high a joint venture allows both parties to share the burden of the project as well as the resulting profits

One great example of joint venture is sbi cards in india ge capital india started offering credit card solutions in india through a joint venture sbi cards sbi cards was a joint venture between ge capital and state bank of india india’s oldest and largest bank the partnership forged in 1998 leveraged the synergies of both companies to offer indian consumers a wide

Range of payment products and services in december 2017 state bank of india and the carlisle group acquired ge capital stake and sbi card post which sbi held 74 while carlisle held 26 percent in the company how a company structures its long-term operations in his own country and for expansion to foreign countries effectively defines how it will be taxed hence the

Choice could have a significantly potential effect on the profitability regulations prevalent in most of the countries generally allow foreign entities to choose classification as a corporation incorporating a subsidiary partnership unincorporated branches limited liability companies llcs distributor and manufacturer representatives and joint ventures we studies

Each of these structures in this lesson remember each choice has its own implications and complications most often corporates operate as a separate legal entity with limited liability typical business models of foreign corporations conducting business activities in other countries involve wholly owned subsidiaries joint ventures representative offices or foreign branches

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Legal Structures in Businesses By TechnoFunc