Small Business Startup Checklist – Company Structure

An important early decision that will have long-term consequences for your business is to determine the legal form it will trade under.  

Things to remember: 

  • The legal form that your business takes will affect numerous aspects of your business trading. Areas affected include how much control you will have over its operations, the amount of tax you will pay, how much money you can take out of the business for yourself and your own level of personal liability if the business fails.
  • If you are running the business by yourself you will be a sole trader. You benefit from having an easily organised business that you are in complete control of. All of the profits go directly to you and it is not very difficult to dissolve the business in the future if you so require. The main disadvantage of this form of business ownership is that you will be personally liable for any debts the business accrues and you could lose any assets you own to in order to pay them off, including your home. It can also be hard for a sole trader to raise funds other than their personal savings or taking out a loan.
  • If you want a similar type of business, but there are more people than just you involved, then you will likely want to draw up a partnership agreement. It is important for a partnership to have a formal agreement in place that clearly sets out the parameters of the business relationship on matters like decision-making, profit sharing and dispute resolution. It also deals with issues that may be important in the future such as what would happen if the partnership is dissolved or if one partner needs to be bought out. Without the agreement in place it could cause chaos down the line. Partnerships benefit from finding it easier to raise capital and drawing on the combined skills and knowledge of all partners. However, there is still unlimited liability in most partnerships and profits must be shared between partners.
  • Other forms of partnership are a Limited Partnership (which is more complex to set up and gives limited input in managerial decisions, but limits liability) and a Joint Venture (similar to a normal partnership but lasts for a limited period of time or for the duration of one project).
  • If limiting personal liability is your main concern, you will probably wish to become a corporation. This makes the business a separate legal entity from you. The owners of a corporation are its shareholders and their only liability is their investment in company stock. The corporation itself is able to quite easily raise capital by selling off stock. However, the initial process of incorporation can be lengthy and expensive. It also can result on income being taxed twice, because the dividends are not deductible.
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