The best legal structure for your business

Jakarasi

If you are currently running a business, the legal framework you’re operating under could be a sole trader, partnership, private or public limited liability company or a non-profit organisation. Either of these institutions offer benefits or drawbacks to the owner.

It’s advisable that you take some time to reflect on the current structure to see if serves your purpose. Will you achieve your goals effectively through that structure? Some of these structures can expose you to unfavourable political, economic or legal factors. You, as the owner, need to ensure that the value of the business is safeguarded because the legal framework you choose will have an effect on your tax or legal liability, and also can impact negatively or positively on the growth potential of the business.

As an entrepreneur, don’t leave the law to decide on what legal structure you are operating under when issues do arise in the future. Make a decision now on the most appropriate legal framework that will address your future needs. If you are yet to start a business make the right decision now on the best legal framework before starting your business. The structure you choose now will affect operating efficiency, transferability of ownership, control, the way you report income, the taxes you pay and your personal liabilities. If you don’t know which route to take consult your lawyer or accountant for advice because certain tax laws might make it difficult to change your legal structure after you commenced operations. In deciding on the legal structure you should consider the issues discussed below.

The kind of business you intend to have can determine the structure you should choose. If you are providing auditing, accounting or legal services, a partnership would be ideal. Other businesses would do well with a sole trader or a limited liability company. So look at the industry you will be operating in and see which legal structures are appropriate. You don’t have to make this choice in isolation. You also need to consider other factors as well which are discussed below.

The other consideration is the cost of setting up the business. Some structures are easy and less expensive to set-up with minimal amounts of paperwork and red tape. Costs that you would normally incur in setting up a business are registration and business license fees.

Some more complex business structures will general be more expensive to set up and require more time to administer the business. You need to factor this during the start-up phase. The Registrar of Companies will require annual returns to be submitted and in some cases you have to submit audited financial statements.

The anticipated size of the company can also have a huge influence on what type of business structure to adopt. How many individuals will be a part of your business and the future prospects or vision will determine the size this business will be. If you expect your business to grow then you need to seriously consider how you will raise the capital for future expansion. You need to have the end in mind. A sole trader or a partnership might be restricted in the ability to raise capital. Until your business has grown and has gained a good credit rating, it will usually be difficult to get business loans which would help your business grow. On your own it’s very difficult to grow the business faster because there are limitations and it takes time to raise adequate capital to grow the business. So if your vision is to grow the business it would be advisable to set a legal framework that will allow this.

Another important consideration is how much control you want to exercise in your business. If you want to own and run the business completely alone then you might choose a sole trader. Control has to do with who is the decision maker in that enterprise. The decision maker will control the management of the business, determine who receives profits, decide whether to get loans or invite outside investors, and be solely responsible for the company’s financial performance.

Tax liability is a major factor to consider when setting up a business. The amount of taxes paid yearly can make or break a business. Some structures are efficient on tax planning whereas in others you will not enjoy some of the tax breaks that you get in other legal structures.

When selecting a legal structure you should think of how much personal liability you would want to carry in the business. Some legal structures do not protect personal assets from business debts. In a sole trader you will have unlimited personal liability. As a sole trader, you will be responsible for all debt incurred by the business. It’s therefore very important to choose a structure that will separate your personal assets from business operations, that way you will protect your personal assets.

You should also consider how easy it is to transfer your ownership to another person. Depending upon the legal structure, a person’s ownership in a business may be transferred, on retirement or if deceased, to another owner in whole or in part simply by the exchange of a document.

Not all business forms are perpetual, they can’t continue into the future after the owner has died. Some forms of business cease when the entrepreneur exits the business. It is therefore important to consider the continuity of existence of your business. If you want the business to be terminated upon your death then becoming a sole trader is the most appropriate option but if you wish to secure your family’s financial future, it is more appropriate to select a legal structure that does not come to an end if you are incapacitated.

To have peace of mind choose the right business structure that aligns with your business’ strategy and goals.

About the author

Stewart Jakarasi is a business & financial strategist and a lecturer in business strategy and performance management. He provides advisory and guidance on leadership, strategy and execution, preparation of business plans and on how to build and sustain high-performing organisations. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com or +266 58881062 or on WhatsApp +266 62110062