Law & Business Structures



Ownership and Control of Business
In general, small businesses are conducted under the following 3 main business structures:
  1. Sole Proprietor
  2. Partnership
  3. Corporation

These are the 3 Basic Business Structures.
However, there may be other structures that will also be suitable, such as Trusts.
Each type of business structure has advantages and disadvantages and you should discuss the merits of each with your lawyer or accountant.

One of the first decisions you have to make after the decision to go into business is what structure you will use to operate the business under. Although this is one of the most fundamental and important aspects of a business, quite often it is one that is given little attention.

If you make the mistake of ignoring this matter, or choosing a structure that is wrong for you or the type of business you intend to take over, then you may well have doomed yourself to failure before you even start.


1. SOLE PROPRIETOR

What is A Sole Proprietor?
A sole proprietor is someone who runs their own business with themselves as the sole owner.

They do not run their business as a Trust, partnership or a corporation which are the other main structures a business can be run through.

As a Sole Proprietor you make your own decisions and all the profits will go into your own bank account. You are taxed on all business profits as an individual.

A sole proprietor is someone who is personally responsible and liable for all the debts of their business so they have to cover any losses from their own personal assets. It means that if there are any problems and debts are run up, then creditors can bring claims against personal assets such as the home and anything else that are owned personally, even if it is not in the business.


Pros and Cons for a Sole Proprietor

The Pro’s and Con’s of operating as a sole trader are:

Pros

  • Usually only a small amount of capital is required to set up and start
  • You answer only to yourself and you can make your own decisions
  • You have full control of your own business
  • You are entitled to all the profits and do not have to share with anyone else
  • There is little bureaucracy involved as no registration is required
  • You have minimum paperwork that is required as there is little to deal with regarding taxation, compliance etc
  • You are able to make decisions quickly and this can be beneficial in some situations

Cons

  • You are personally liable for everything to do with the business
  • You have to make your own decisions because there is no one else to share the operation of the business
  • You often find yourself having to work long hours because you cannot share the load with anyone else
  • It is difficult to take time off because there is no one else that can step in
  • You are totally responsible for any losses that occur in the business so creditors can make a claim on your personal assets if necessary
  • You will generally have less avenues for funding so the larger businesses can have an advantage over you
  • Lending institutions may prefer to lend to larger businesses because of their structure and their level of business