When you’re starting out, the structure of your business is unlikely to be top of your list of priorities. You’re more likely to be focusing on finances, marketing and product development. But the business structure you select has important implications as it affects your tax, liabilities, growth and investment opportunities whether you’re self-employed or a company. And so, in this article we provide an overview of the three main structures.
As you would imagine a sole trader is someone who works for themselves. It’s the simplest business structure, making it a popular choice especially for the self-employed.
Among the advantages is the fact that costs are low and the simple structure means that it’s easy to run. What’s more, you retain complete control of your operations and all the profits.
There are, however, some disadvantages and the most important is that you have sole responsibility for all taxes and debts. In addition, many sole traders find it hard to secure loans or investment and it can be harder to sell your business.
There are no great legal processes you need to go through to set up as a sole trader – all that’s required is an IRD number for paying tax and any industry-relevant permits, licences or registrations.
Under this type of structure, two or more people get together to run a business and agree to share assets, liabilities, knowledge and skills. Partnerships are most often seen in professional settings such as lawyers and accountants or in the farming industry.
As well as being easy to get started, another advantage of this type of set up is that the business’s operating costs are shared across several people.
Among the disadvantages is that the partners can be liable for debts incurred by other partners. What’s more, this structure can put individuals’ personal assets at risk and it can become complicated if one of the partners dies or wants to leave.
There are no special legal requirements involved in setting up a partnership – most simply get going with a formal partnership agreement. Unless the partnership agreement says otherwise, shares are usually distributed equally. A partnership must, however, have its own IRD number although individual partners account for their share of the profits or losses in their individual tax return.
The final type of structure is a company. To start a company, you must register it with the Companies Office. A company is a separate legal entity from its shareholders. In some companies one person or a group such as a family own all the shares, whereas other companies list their shares on the stock exchange where the public or other companies can buy them.
A company’s legal status limits the liability its shareholders have in the business to the value of their shares. And company profits are distributed to shareholders, who are taxed individually on their overall personal income.
Choosing the right structure for your business is an important decision and that’s why we recommend consulting with a lawyer or accountant before you make any final selections.