One of the most important decisions you have to make before starting a business is, choosing your business structure wisely. This is essential for your business success because, it will influence your taxes, your personal liability, and your earning potential.
After unfolding the different types of business ownership last week, this week we analyse the different types of business structures that you can choose from, and their pros and cons.
> SOLE PROPRIETORSHIP
Advantages of sole proprietorship
• You are the boss.
• You keep all the profits.
• Start-up costs are low.
• You have maximum privacy.
• Establishing and operating your business is simple.
• It’s easy to change your legal structure later of circumstances change.
• You can easily wind up your business.
Disadvantages of sole proprietorship
• You have unlimited liability for debts as there is no legal distinction between private and business assets.
• Your capacity to raise capital is limited.
• All the responsibility for making day-to-day business decisions is yours.
• Retaining high-calibre employees can be difficult.
• It can be hard to take holidays.
• You are taxed as a single person.
• The life of the business is limited.
Advantages of a partnership
• Two people (or more) are better than one.
• Easy to establish and start-up costs are low.
• More capital is available for the business.
• You’ll have greater borrowing capacity.
• High-calibre employees can be made partners.
• There is opportunity forincome splitting, an advantage of particular importance due to resultant tax savings.
• Partners’ business affairs are private.
• There is limited external regulation.
• It’s easy to change your legal structure later if circumstances change.
Disadvantages of a partnership
• The liability of the partners for the debts of the business is unlimited.
• Each partner is ‘jointly and severally’ liable for the
partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts.
• There is a risk of disagreements and friction among partners and management.
• Each partner is an agent of the partnership and is liable for actions by other partners.
• If partners join or leave, you will probably have to value all the partnership assets and this can be costly.
> PRIVATE COMPANY
Advantages of a private company
• The company has a perpetual lifespan and can continue if one of the owners dies.
• Shareholders have limited liability, but directors are personally liable, if they are knowingly part of running the business in a reckless or fraudulent manner.
• Transfer of ownership can be done with ease.
• Raising capital is also easier.
• Management can be done efficiently.
• Private companies can be adapted to both small and large businesses.
• Private companies are not required to file their annual financial statements, and so their annual financial statements are not available to the general public.
Disadvantages of a private company
• Private companies are subject to many legal requirements.
• They are more difficult and expensive to register compared to a Sole Proprietorship.
• At least one director is required.
• Shares may not be offered to the public and cannot be listed on the stock exchange.
• A minimum of two shareholders are required for a meeting, except in the case of a one-person company.
• Annual financial statements must be audited.
> PUBLIC COMPANY
Advantages of a public company
• Raising capital through public issue of shares.
• Widening shareholder base and spreading risk.
• Other financing opportunities- stock exchange listing. Banks and other financial institutions may be more willing to extend finance to a public company.
• Growth and expansion o p p o r t u n i t i e s - e n o u g h financial muscle to pursue
new projects, products and markets, capital expenditure to support business, and to grow organically.
• Prestigious profile and confidence-perception of being more established, larger,
and more powerful can affect customer, suppliers, and employees.
• Easy transferability of shares and exit strategy.
Disadvantages of a public company
• More regulatory requirements to protect shareholders.
• Higher levels of transparency-accounts often scrutinised by analysts and media.
• Ownership and control issues- there is likelihood that the original owners can lose control of the direction of the company.
• More vulnerable to take- overs-can be vulnerable to a hostile takeover if a majority of shareholders agree to a bid.
• Initial financial commitment is higher.
>>Quote of the week
“Failure is only an option; so is success. Please choose wisely.”
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