Deciding on a Business Structure
A well thought out business structure is one of the keys to success. There are several different types of business structures; the most popular are: sole trader, partnership, trust or company. There are advantages and disadvantages for each type; however, knowing what each one actually is will help you choose the best business structure to get the most out of your venture.
As a sole trader, you’ll be an ‘individual’ trading on your own. The benefits are that you solely benefit from profits, don’t need to share earnings with anyone, and retain complete control – making all the decisions yourself.
However, the downside is you’re subject to unlimited liability; so, if your business fails or gets into debt, you’re the one held responsible – which can even result in you losing your home and other personal assets to pay off the debt.
Partnerships are a union of ‘individuals’ or other business structures. Going into partnership means you’ll be in business with other people or entities – no more than twenty. You gain advantages such as being able to run ideas and decisions past other people, tap into more resources, more capital, and greater borrowing capacity. There’s also the possibility for substantial tax savings through income splitting.
Some negatives are that you must divide the profits and agree on how they get split fairly; allow other people the right to their input and decisions about the business; and refrain from making decisions without consulting your partners first.
A trust is an entity which holds an asset – like a property or income – for the benefit of its members. One of the great advantages of a trust is, once set up, assets are protected and liability limited in relation to the business. Furthermore, beneficiaries are generally not liable for trust debts.
A few disadvantages are the higher costs in establishing and maintaining a trust, along with the administrative work to comply with extensive regulations.
Proprietary Limited Company (Pty Ltd)
A Proprietary Limited Company is a legal entity with shareholders. Some of the benefits are the limited liability; shareholders aren’t normally liable for debts; and capital can be easier to raise.
However, some downsides are higher set up and maintenance costs; complex reporting obligations; and high penalties in the case of director negligence. Furthermore, your financial affairs are made public and it can be costly if and when you decide you need to wind up.
As you can see, there are varying advantages and disadvantages to be weighed up when deciding which business structure is best for you. Consider the you and your business’s needs, resources and goals against each advantage and disadvantage before deciding. Regardless of which structure you end up setting up, getting professional advice from a certified accountant – with business experience – will ensure you don’t misstep at this early, yet vial, stage of your business.