Before registering your business, it is necessary to consider the different options available. Usually, there are three common types of businesses: Sole Proprietorship, Partnership and Corporation.
Each of these types has different implications for liability, taxation and succession, which are vital in the same time. It’s good option to contact a lawyer or accountant before you make a decision.
Also, keep in mind that that Sole Proprietorship and Partnership names have no statutory name protection. If this is important to you, then you might want to incorporate your business.
There are a number of advantages and disadvantages that you should keep in mind when deciding which type of business is the most suitable for you and your needs.
We’ll start with explanation on Sole Proprietorship.
Sole Proprietorship as a Business Setup
Starting a Sole Proprietorship is the simplest way to set up a business. As a sole proprietor you are fully responsible for all debts and obligations that are related to your business. The sole proprietor is said to be self-employed.
Some of the important functions required for the successful operation of the Sole Proprietorship business:
- You secure the capital
- You establish and operate the business
- You assume all risks
- You accept all profits and losses
- You pay all taxes
This type of business has its advantages as well as disadvantages. Here are the some of the most important.
Advantages of Sole Proprietorship
- Low start-up costs
- Greatest freedom from regulation
- Owner is in direct control of decision making
- Minimal working capital required
- Tax advantages to owner
- All profit goes to owner
Disadvantages of Sole Proprietorship
- Unlimited liability
- Lack of continuity in business organization in absence of owner
- Difficulty in raising capital
- No name protection
Partnership as a Business Setup
A Partnership is an agreement in which you and one or more people share resources in a business with a goal to make a profit. Usually, this is what is known as General Partnership. In this type of Partnership, you and one or more other owners would share the management of a business, and each partner is personally liable for all debts and obligations incurred. This means that each partner is responsible for, and must assume the consequences of the actions of the other partners.
There is also a Limited Partnership, that involves limited partners who combine only capital and who are not involved in managing the business. This means that they cannot be liable for more than the amount of capital they have contributed. This is also known as limited liability.
A Limited Partnership also involves general partners, who are involved in management. General partners are fully liable for all the debts and obligations of the business, but may be entitled to a greater share of the profit.
In order to establish the terms of the Partnership and to protect yourself in the case of a disagreement or dissolution of a Partnership, it’s necessary to write down a Partnership agreement. According to the terms of the Partnership agreement, you would share the profit as well.
As well as Sole Proprietorship, this type of business has its strong and weak points.
Advantages of Partnership
- Easy formation
- Low start-up costs
- Additional sources of investment capital
- Possible tax advantages
- Limited regulation
- Broader management base
Disadvantages of Partnership
- Unlimited liability
- Divided authority
- Difficulty in raising additional capital
- Difficulty to find suitable partners
- Possible conflicts between partners
- Partners can legally bind each other without prior approval
- Lack of continuity
- No name protection
Incorporating as a Business Setup
A Corporation, also known as a Limited Company, is a legal entity with an independent existence separate and distinct from its members (shareholders).
The act of Incorporation gives life to a legal entity known as the Corporation or Company, which can acquire assets, go into debt, enter into contracts, sue or be sued.
Ownership interests in a Corporation are usually easily changed. Also, shares may be transferred without affecting the corporation’s existence or operation.
The following characteristics distinguish a Corporation from a Partnership or Sole Proprietorship:
Limited Liability: No member can be held personally liable for the debts, obligations or acts of the corporation, beyond the amount of share capital the members has subscribed.
Perpetual Succession: Because the corporation is a separate legal entity, its existence doesn’t depend on any of its members. If one or more shareholders quit, the Company still exist, which is no case with, for example Sole Proprietorship, where the owner is Company itself.
This business model also has its advantages and disadvantages, so let’s take a look at them.
Advantages of Incorporation
- Limited liability
- Possible tax advantage (small business tax rate)
- Specialized management
- Ownership is transferable
- Continuous existence
- Separate legal entity
- Raising capital is easier
Disadvantages of Incorporation
- Closely regulated
- Most expensive form of business to organize (higher start-up costs)
- Possible double taxation of profits
- Shareholders (directors) may be held legally responsible in certain circumstances
- Personal guarantees undermine limited liability advantage
Those were some basic information about different types of businesses. It’s suggested however, that you should consult your lawyer or accountant on every aspect of business startup, especially on the terms of liability, both limited and unlimited.
