Selecting a Business Structure

The first organisational issue to consider when starting a new business is what legal structure to use. There are three basic options to choose from:

  • Company
  • Partnership
  • Sole Trader

If you’re going into business for yourself, it may be tempting to skip all the paperwork involved in forming a company and just operate as a sole trader. But you may regret this decision in the future, because a sole trader is personally liable for all of the debts of the business. For example, if you are a sole trader and one of your employees defrauds a customer, that customer could go after your personal assets for reimbursement.

This is why most people who start a new business form a limited liability company, where the responsibility of shareholders for the debts of the company is capped at the amount that remains unpaid on their shares, if any.

Limited liability companies come in two basic forms: public and private. In a private company, the number of shareholders is strictly limited and the shares are subject to certain restrictions on transfer. Public companies, on the other hand, can have an unlimited number of shareholders and issue freely transferable shares.

Despite certain advantages to being a public company, most start-up companies begin as private companies in order to keep decision-making in the hands of a small group of people and avoid the disclosure and reporting requirements placed on public companies, which are time consuming and costly.

If you’re going into business with other people, then forming a partnership is an alternative to forming a company. There are certain advantages to forming a partnership, such as the ability to avoid paying tax at the company level and avoid filing annual returns and accounts. But once again, partnerships do not provide the owners who are involved in running the business with protection from personal liability. In addition, forming and operating a partnership can be just as complicated as a company.

So chances are that when you start your new business, you will do so as a private limited liability company, and therefore the first thing you will need to do is prepare and file your incorporation documents.

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