When it comes to taking charge of your entrepreneurial dreams and spearheading a small business, the first step to ensuring you’re on the right direction is to choose the business structure that suits your needs for years to come.
Set up wisely, a legal structure for your small business is a set of rules that will establish the way your business is run, the rights of its owners and its relationship with the outside world. Be it a corporation, a limited liability company, a nonprofit organisation, or a sole proprietorship, you will want to ensure that your business is set up to operate in a legal and fiscally responsible manner.
Different Types of Business Structures You Should Know
1. Sole Trader
A sole proprietor is the most common form of business structure. It’s suitable for people starting businesses doing it for the love of the craft, without making as many legal arrangements as other structures.
The sole trader is the simplest and most affordable option, but keep in mind that your personal assets are still at risk, and creditors may be able to claim them if your business defaults on the payment of debts or becomes insolvent.
With that in mind, it goes without saying there are pros and cons to becoming a sole trader.
Pros:
- Low setup cost;
- You’re your own boss;
- You don’t have to share profits with any other owners;
- You can choose whichever structure best fits your personality and skills;
- Less complicated regulations;
- Losses can be used against other individual income if any.
Cons:
- You can lose your personal assets if the business is in financial trouble;
- You’re responsible for everything your business does, including any mistakes;
- You can’t raise capital from other people;
- All the profits will be taxed under your name for the year.
2. Partnership
A partnership can be a great way to get your business off the ground. It allows you to share the risk and reward of starting a business with others while giving you the freedom to run the business as you want to.
On the downside, it’s important to remember that a partnership can be a legally complex structure and more difficult to administer than other forms of business. Adding partners can also cause major headaches, as new partners may not be as keen on contributing to the business as you need them to be.
Pros:
- You don’t need to pay corporation tax;
- You share the profits with your partners;
- You can raise capital from other people;
- You’re able to share the workload with your partner;
- You can start a limited company with a partner;
Cons:
- Your business will be legally complex;
- New partners may not be as committed to the business as you need them to be;
- You might want to end your partnership at some point;
3. Trust
Trusts are a legal structure that can protect your legacy by ensuring your wealth is distributed to those you love after you’re gone. You can also choose to protect your business or even a set of assets like property or investments, which means that your business or assets can also be preserved for your beneficiaries after your death.
Pros:
- You don’t need to pay corporation tax;
- You can pass on your wealth to your beneficiaries;
- You can protect your business and assets for your beneficiaries;
- Flexible income distribution to family members and relatives;
- Trustee can be individuals or a corporate.
Cons:
- It’s a complicated structure to administer;
- It’s expensive to set up and maintain;
- You must have a great deal of trust in the people you leave your wealth to;
- Individual trustee is liable to the risks of running a business.
4. Company
A Limited Company is one of the most popular forms of business structure, as it gives the benefits of running a business without having to risk losing your personal assets. By setting up a company, you’ll be able to raise capital from investors and share the value of your business with more people. This legal structure can also limit your liability and is used by many small businesses.
Pros:
- Good for tax planning for high income earners.
- You can retain profits in a company to defer higher individual tax;
- You can raise funds from other people;
- You can pay dividends to shareholders at your will;
- You can buy and sell shares in your company;
- Your personal assets are protected from company’s liabilities in most cases, which means that creditors can’t claim against your personal assets in the case of business failure;
Cons:
- It’s expensive to set up and maintain;
- There are corporate regulations and rules to be aware;
- Some tax benefits may not be available to the company.
The Bottom Line: The Importance of Choosing the Right Structure for Your Budding Business
Choosing which structure is best for your business will help you keep your personal assets and profits safe and help you prevent financial problems from affecting your personal life. Hiring an accountant to help you file your taxes will also be a worthwhile investment and one that can secure your financial future.
For other advanced structures, please contact M1 Accounting & Taxation.
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