The kind of legal formation you select for your business can have a most important influence on the success or failure of your venture. This is because your ability to make decisions rapidly, to compete in the market-place and raise additional money if required is directly related to the legal makeup of that business.
There are basically three legal structures to choose from: sole proprietorship, partnership and corporation or limited company. No on form is better than another per se, because each has its own peculiar advantages and disadvantages. Therefore, what is important is to choose the legal structure that is best for you.
There are several questions that you should ask yourself to help you make your mind up which kind of business to choose. What do I already know about this sort of business? In which areas of the business will I need assistance? How much money will I require to get started? Where will I be able to get money from, should I want to expand later? What types of risks will I be exposed to later? How can I limit my liability? What kinds of taxes will I be required to pay?
Sole Proprietorship More than 75% of all businesses in the United States are sole proprietorships. The fundamental nature of this sort of business is that they are owned by just one person and normally, that person is directly concerned in the day-to-day running of that business. As a sole proprietor, you have total responsibility for that business and all the profits from that business will be yours as well, as will all the debts and liabilities.
The advantages of a sole proprietorship are that you are the only boss, it is very easy to get started, you keep all the profits, income from the business is taxed as your personal income and you can stop whenever you like. The disadvantages are that you take on unlimited liability, your ability to raise investment capital is limited, you have to be able to do everything yourself from book-keeping to advertising, retaining high-quality employees can be difficult and the life of the business is limited to your own life time.
Partnership A partnership is when two or more people share in the ownership of the business. The partners are responsible for every decision collectively, although decision-making might be dived up unevenly by agreement of all partners equally. All agreements should be written down, preferably in the presence of a solicitor.
The advantages of a partnership are that you get the assistance of other points of view, it is simple to get started, more investment capital is available, partners pay only personal income tax, high-quality employees can be made partners to encourage them to stay. The disadvantages are that partners have unlimited responsibility, profits must be shared,partners, may quarrel and the lifetime of the partnership is limited by death.
Corporation A corporation differs from the other models of company, because a corporation is considered as a ‘person’ by the law. It has a entirely separate existence from its owners. As such it can sue and be sued..
The advantages of a corporation are that stockholders have limited liability, corporations can raise the most investment capital, they have an unlimited lifespan, ownership is easily transferable and they utilize specialists. The disadvantages are that they are taxed twice, starting up is expensive and they are more closely regulated.
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