When starting a new business, it is necessary to determine which legal structure your business will fall under. There are several different ways a business can legally be structured, so it is important to have a good understanding of each structure before making your choice. The legal structure of your business can affect many different things, including the following:
*Your ability to have adequate protection against potential business risks
*Your individual and business tax liability
*Government regulation over your business
To help you make a more educated decision, here are a few important things to know about three of the most common business legal structures. Make sure to consider the advantages and the disadvantages of each legal structure. Because this decision may have a lasting impact, it is often recommended to speak with a professional who can help you make the best decision.
1 – Sole Trader
If you are running a business entirely on your own, you may want to consider registering your business as a sole trader. This is generally viewed as the easiest method because there are fewer people involved in the decision making and there are also fewer government regulations. However, for many newly forming businesses there are multiple people involved in the ownership and management of the business, making this option impossible.
Under a sole trader, the business owner is in complete control of any company profits and responsibilities. Although convenient, this also leaves the owner entirely responsible for any debts the business may incur. Some business owners view this liability as undesirable because there is such a huge responsibility and risk placed on only one individual.
2 – Partnership
If you are joining with another individual to start a new business, a partnership may be a good option for you to consider. In a partnership, both parties are equally responsible for the business. Under this type of a structure, business decisions that are made by one partner, even without the consent of the other, fall under joint responsibility. Partners also share in all business profits and any incurred business debts.
Many business owners like this option because the two different individuals can bring together a wider variety of experience and expertise than one alone. Many also prefer the combined liability because it leaves less pressure and potential risk on one individual. On the other hand, whenever there is dual ownership, there is also the inherent risk of disagreement and a lack of mutual cooperation. If you have any concerns about working jointly with another person, you may want to consider carefully before agreeing to a business partnership.
3 – Proprietary Limited Company
For businesses that are more structurally complex, a proprietary limited company may be a better option. Under this type of a business structure, business owner(s) are considered separate from the business. This can greatly limit the amount of liability placed on one individual. There are several specific legal obligations that must be met by company directors under a proprietary limited company. Distribution of business profits and essential legal responsibilities are then agreed upon.
How To Make The Decision
As you consider which legal structure to use for your business, it is important to do your research. Your decision may have lasting effects on your business. Speak with a consultant who can help you make a wise decision.