Before one thinks of settling on a particular business legal structure, there are some factors which an individual should put into consideration. The main aim of these concerns is that when one chooses a legal structure, it costs time and money to change it. So, it’s vital to research before you make these types of big decisions.
Below are three factors to be considered when selecting a legal structure for your new small business:
An individual’s personality can’t be separated from his/her business. The type of person you are will largely determine a legal structure for your business. If you are the owner, and one in control, the best choice is to run a sole proprietorship. Whenever you pay another person to manage the business, you increase the chances of finding investors who have an interest in securing equity in your company. The more organized and thought out your game plan, the more likely to convince others to support you.
Most businesses come with risks. Every entrepreneur is a risk-taker though the degree of the risks differs. For a sole proprietorship, the owner takes the responsibility of the liabilities of business in case of an eventuality. Whenever the liabilities of the business cannot be paid off by the assets, then you’re responsible. In the case of a partnership, the liabilities from the businesses are shared among the partners and according to partnership deed. If your business or company has been registered as a limited liability company, then the debt will be limited to the share amount in the company. Even if the company’s assets can’t pay off the liability, then you can simply pay using your personal property except in a situation whereby you have pledged it as collateral for a loan.
Tax planning depends on the choice of an appropriate legal structure. Every business owner should understand that businesses are taxed differently under each legal structure they choose. A sole proprietor doesn’t pay tax on profit, but instead, they are taxed on the income derived. The same happens to partnership businesses. In case your business is incorporated as a limited liability company, the profit will be taxed under Company Income Tax Act unlike the sole proprietors and partnership businesses which are taxed under Personal Income Act – so they have different tax rates. Therefore, choosing an appropriate legal business structure can give you some tax benefits.
In conclusion, it is a significant decision to adopt an adequate legal structure for your business. You need to consult an experienced business lawyer to ensure that your business structure suits both your personal needs as well as those for the business.
Here is more information on business structures: