Choosing the right legal structure for your business
- COST OF FORMATION: One of the most common factors considered when deciding on a business structure is the amount of money one is willing or able to spend on its registration. Sole proprietorship and Partnerships are relatively less expensive to form in comparison to the cost of incorporating a company. This however should be the least important factor to consider when deciding on a business structure. Opting for a structure solely because of the minimal cost involved in its formation could prove detrimental to the business in the long run.
- EXTENT OF LEGAL LIABILITY: Under a sole proprietorship or partnership, the owner or partners will be held personally accountable for all their business obligations and debts. What this means is that such an owner or partner will stand the risk of being held personally liable for any business debts. In this sense, disgruntled creditors can come after the personal assets of the sole proprietor or partner to set off a business debt. Can you afford the risk of personal liability? If no, then reconsider the structure of your business.
- CONTROL AND BUSINESS GROWTH: An exciting feature of a sole proprietorship is the total control the owner exercises over the business. Because a sole proprietorship is a one-man business, all decisions concerning the business are solely made by its proprietor, unlike incorporated companies where the Board of Directors and shareholders have certain powers over the affairs of the business. The total business control afforded by a sole proprietorship may be tempting but it is quite important to weigh in other factors.
- TAXATION: Which structure will afford me and my business the most tax relief possible? Incorporated companies enjoy a number of tax incentives based on various criteria such as the nature of the industry and the number of years in operation. In deciding which structure to apply to one’s business, it is best to consider the tax relief options available to incorporated companies in the particular industry and contrast that with the benefits of being liable to only Personal Income Tax under a sole proprietorship or partnership structure.
- REGULATORY REQUIREMENTS AND DOCUMENTATION: While sole proprietorships and partnerships are subject to minimal regulatory interference, incorporated companies are subject to stringent regulatory requirements. Under a sole proprietorship or partnership arrangement, a business owner can make all sorts of business decisions with minimal regulatory interference, whereas for incorporated companies, most key decisions especially those that have to do with the structure and capital of the company, have to be reported to the regulatory authorities.
- GOVERNMENT CONTRACT BIDS: If one of your proposed business plans as a business owner is to bid for government contracts, it is advisable for the business to be set up as an incorporated company because government bids usually have requirements which must be met and most of these are restricted to incorporated companies. For example, to be eligible for some contracts, the government specifies the minimum paid-up share capital of companies which would be considered for the bids.
- BUSINESS VENDORSHIP REQUIREMENTS: A lot of businesses thrive by serving as registered vendors for large companies. Vendors support the operation of the companies by providing key services or goods vital to the sustenance of the company’s business. All companies have their various requirements for business owners to qualify as vendors and one of these is usually that the company be duly incorporated. Once again, this is simply to ensure that the vendor operates a well-structured business and has the capability to deliver on its proposed service.
- INDUSTRY REQUIREMENTS: One of the key factors to consider when venturing into business is the industry that the business falls under. There are certain industries that require a business to be incorporated as a company. Most of these types of industry have regulatory requirements which even go further to expressly specify the minimal paid-up share capital that such a company must possess to operate as a business in the industry. A sole-proprietor, for example, cannot run the business of insurance.
You should be able to answer these questions
- What legal structure does your social enterprise have?
- Are there special regulations covering your profession?
- What is the stage of development of your venture?
- What were the most important milestones to date?