Liability and Various Structures

What is the Liability Under the various Structures?

  1. Sole Proprietors
    They have no protection from legal liability which can be costly to the business owner if things don't work out.

  2. Partnership
    This is similar to a sole proprietor except there is more than one owner involved. The exposure to liability is the same, if not greater, than a sole proprietor because each partner is responsible for the other partner's actions.

  3. Limited Liability Corporation
    This entity is preferred by most business owners mainly because it gives protection from liability to its owners and shareholders. It provides protection because the liability of the owners is limited to the amounts still unpaid on the shares that each had taken.

Your Final Choice May Depend on Certain Factors
An important decision you will make as a business owner is how to legally set up your business. Your choice may depend on a number of factors so take the time to work through each before deciding.

The organisation you select will depend on the following:

  • Need for capital.
  • Liability issues.
  • Legal restrictions required.
  • Number of people involved in your operation.
  • The kind of business that you will have.
  • The advantages and disadvantages, tax-wise.
  • How you want to split future profits.
  • What you want to do with the business when it is time for you to retire.

It is important that the legal form that suits your needs, management style and financial requirements is looked at first. You should talk through these issues with your accountant or professional advisers before implementation.

Details of the Types of Business Structures
There are 5 types of business structures that you can use.

  1. sole trader: One person controls, manages and owns the business.

  2. partnership: Two or more people run the business together with other partners.

  3. corporation: This structure is a legal entity and is recognised as a legal 'person' in the eyes of the law.

  4. Trust.

  5. Non- profit Organisation.

1. Sole Trader
The simplest form of business structure is that of a sole trader. This is where you trade on your own account as a self-employed person. The main advantage is that you have full control and there is little cost involved in setting up and starting.

The downside is that you are personally responsible for all the debts of your business and your personal assets can be in jeopardy if things go wrong with the business. This is because creditors will bring a lawsuit against you personally. They will try and recover any losses suffered or money owed, by taking your personal assets.

A sole trader means that you are not distinct from the business itself, unlike a company where the company is a person in the eyes of the law, and the shareholders in the company are separate people in the eyes of the law. Before choosing this structure, you need to consider your personal responsibility for all the liabilities of the business, without any limitations. This is a significant disadvantage that needs to be considered.

The advantages and disadvantages of sole traders are:

  • Advantages
    • Full control over the business.
    • Easy to set up.
    • Easy to close.
    • Owner is personally entitled to all the profits.
  • Disadvantages
    • Personal assets are at risk.
    • Difficulty in taking time off.
    • May be problems with who takes over the business when you are ready to retire, if you are ill or are deceased.