Business Structures

SOLE PROPRIETORSHIP

A sole proprietorship, also known as a sole tradership, individual entrepreneurship, or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole trader does not necessarily work "alone" — it is possible for the sole trader to employ other people. The sole trader receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietors.
Sole Trader

PROS 

  • Easy to setup
  • Easily dissolved
  • Not highly regulated
  • Cheaper (Setup and maintenance cost)
  • There are hardly any restrictions and very few forms to fill out.
  • As a sole proprietor, you control all the money made by the business.
  • You make all business operation calls.
  • You are management and, thus, can respond more quickly to day-to-day changes and decisions.
  • You experience less government control and taxation. You don’t have to keep incorporation records and annual corporate records.
  • You don’t have to do a separate tax return for the business, and you don’t have to prepare a balance sheet for the business.

Cons

  • As a sole proprietor, you are responsible for 100 per cent of all business debts and obligations. This liability covers all of the proprietor’s assets, including his or her house and car. Additional insurance coverage may be needed to cover personal injury or physical loss that may hamper the continuity of the business
  • The death, physical impairment, or mental incapacitation of the owner can result in the termination of the business.
  • It is typically more difficult for sole proprietors to raise operating cash or arrange long-term financing because they have fewer assets.
  • All the decision-making power rests with one individual.
  • A sole proprietorship appears less professional than a corporation or an LLC.
  • The business does not have a separate legal personality from the owner. Therefore, the owners’ personal assets may be seized to pay the debts of the business.
  • The liability of the business is borne by the owner and not the business
  • Lack of continuity- when the owner dies, the business ends

 

 

PARTNERSHIP

A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits. There are several types of partnership arrangements. In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-called "silent partner," in which one party is not involved in the day-to-day operations of the business. There are also two types of partnership. If a company operates as a partnership, there are two distinct ways of doing this - as a general partnership and as a limited partnership.

A General Partnership

A business with more than one proprietor has the benefits of a wider pool of knowledge, aptitudes, and contacts when compared to a business that is operated by a sole proprietor. Further advantages of this type of business include:

  • Easy to set-up
  • Do not have to pay income tax (profits and losses reported on each partner’s tax return form instead)
  • Easier to raise funds
  • Prospective and current employees are motivated to work for the organization if the opportunity to become a partner exists.
  • Cost-effective: Each partner specializes in a certain area of operation.
  • Partners support each other, and the collaborative efforts make way for brainstorming opportunities.

 

Disadvantages of a General Partnership

In a general partnership, each partner is responsible for the commitments and responsibilities of the business, unless a business “prenup” is signed. The predominant concern for this is if one or more parties decide to exploit the business in some way or make any mistakes, then all parties are responsible for the fallout, not purely those involved in the matter. Further disadvantages can include:

  • Since the business operates as a group of collaborative individuals, rather than as one unit, if a third party decided to sue any partner, they can sue them as an individual rather than as the entire company.
  • If the business gets into financial difficulty and does not have enough cash or assets to cover the costs, then the partners will have to utilize their assets.
  • Can be unstable – a partner may die or decide to withdraw from the company. Fallouts and situational changes are also potential risks.
  • Decisions cannot be made independently; all partners must consult each other before proceeding with an idea, so there is slightly less flexibility here than in a sole proprietorship.
Partnership

A Limited Partnership

The alternative to a general partnership is a limited partnership, which operates in a similar fashion, however, there are limitations put upon the involvement of the partner’s personal assets and expectations in relation to the business.

The key advantages to this type of business are:

  • Partners have limited liability when it comes to problems and lawsuits.
  • It is easier to attract investors as a result of the limited liability

Disadvantages:

  • State fees must be paid, and a Certificate of Limited Partnership filed before the business can operate.

If a partner becomes active within the company, then they may earn a general-partner personal liability which then means that they will be fully liable for the business’s debts

LIMITED LIABILITY COMPANY (LLC)

A limited liability company (LLC) a form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation under it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership.

PROS 

  • Separate Legal Personality
  • Easy to raise capital to finance the company – this is the case especially for registered public companies – as these companies offer shares to the public for a price and are able to raise Millions of Dollars through Initial Public Offerings (IPOs).
  • Less risky – Liability is limited and not borne by the members as in the case of a partnership and a sole trader as a company has a separate legal personality
  • Continuity – A company continues even after the owner/shareholders die.
  • Clearly defined management hierarchy – Owners are separate from the managers. Each company has managers and supervisors who are responsible for different areas.
LLC

CONS 

  • Highly regulated – Annual returns must be filed by these companies with the Companies Office.
  • These companies must also hold annual general meetings and in the case of publicly listed companies.
  • The company’s accounts must be audited annually.
  • High setup and maintenance cost- It costs $25,000 to register a Limited liability company.

 

 

CORPORATION

A corporation is a business entity that is owned by its shareholder(s), who elect a board of directors to oversee the organization’s activities. The corporation is liable for the actions and finances of the business – the shareholders are not. Corporations can be for-profit, as businesses are, or not-for-profit, as charitable organizations typically are. There are two major types of corporations as well: Subchapter C corporations, which are larger organizations owned by multiple shareholders, which can also be other businesses, and Subchapter S corporations, which are often (but not always) smaller businesses owned by an individual shareholder

PROS 

Before creating a corporation, consider what you hope to gain from establishing this separate entity.

  • As with some other types of businesses, corporations provide liability protection for its owners, who are called shareholders.
  • Companies hoping to raise money from investors will have an easier time as a corporation, which can sell ownership shares.
  • Corporate profits are taxed, but at a lower rate than the personal income tax rate individuals pay.
  • Potential employees may find working for a corporation, with the prospect of ownership benefits, to be more appealing than working for a privately-held company.
  • The corporation can offer a medical reimbursement plan, deducting the cost of providing insurance to employees while allowing employees to use the benefit tax-free.

CONS 

While corporations can certainly shield owners from liability, the downsides are sizeable and very costly:

  • C Corporations are complex and expensive to set up.
  • Once established, corporations spend significant sums of money to stay on top of changing business regulations and timely filing of paperwork. They are best for large organizations with many employees.
  • Corporations pay federal, state, and sometimes local taxes on profits, unlike LLCs.
  • The corporation pays taxes on dividends paid to shareholders, who then pay taxes on that income themselves.