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Chapter 8 of 16

Types of business structure


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Types of business structure

When first thinking about how to start a business, not many people worry about structure. But your business structure can affect how you're treated by the government and by the law. Here are some of the ins and outs.

Business structures and their effects

You can structure your business as a sole proprietorship, partnership, limited liability company (LLC) or partnership (LLP), S-Corporation, or C-Corporation. Your choice will affect your admin burden, tax, legal status, and your ability to raise money by selling shares. This table runs through sole proprietor vs partnership vs LLC vs corporations.

Main differences between partnership and company and sole trader are legal protection, admin burden and tax.

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If you don’t choose a business structure

If you don’t choose a structure when starting a business, you’ll be assumed to be a sole proprietor. That’s how a lot of people start out. However, it’s worth understanding what it means to be a sole proprietor, and getting your head around the other structures. Speak to a lawyer or accountant before making any changes.

What is a sole proprietorship?

A sole proprietorship is a single-owner business. It doesn’t have to be a single-worker business, so you can hire staff.

Advantages of a sole proprietorship
It’s easy to set up as a sole proprietor and tax is simple. You just declare income on your personal tax return.

Disadvantages of a sole proprietorship
A sole proprietorship doesn’t have any special legal status, which means the owner is personally responsible for what the business does. If the business gets into debt or legal trouble, so does the owner. Your choice of insurance becomes very important.

Sole proprietorship structure has simple admin and tax, but offers little legal protection

What is a partnership?

A partnership is owned by two or more people. There are no rules about how it’s divided. One partner can own 99% of the business.

Advantages of a partnership
It’s easy to set up as a partnership, though you’ll need an official letter that sets out the agreement between partners. Tax is simple too. You just declare your share of business income on your personal tax return.

Disadvantages of a partnership
If the business gets into financial or legal strife, the partners do too. You could also get into difficulty if one of the other partners does something wrong. Your choice of insurance becomes very important.

Partnership structure has simple admin and tax, but offers little legal protection

What’s in a partnership agreement

A simple business partnership agreement should:

  • state the legal name of the partnership and say what you do

  • name the owners and show how many shares each has

  • appoint a primary business officer

  • say when and how income is distributed among the partners

  • include a process for resolving disputes

  • identify how bookkeeping and finances will be managed

  • outline how the partnership can be wrapped up (and how debts or profits would be distributed)

As you can imagine, even a simple business partnership agreement can get big and complicated. Search the internet for examples or, better still, ask an accountant or lawyer to help.

What is an LLC (limited liability company)?

An LLC is legally separate from its owner (or owners), which means you’re less exposed to legal or financial risks. An LLC can be owned by one person or many.

Advantages of an LLC
You get some legal and financial protection if things go wrong – a lawyer can give you the lowdown. Banks and investors sometimes take companies more seriously when considering loans. And tax can be as simple as it is for sole proprietorships and partnerships.

Disadvantages of an LLC
It will cost you more to operate as an LLC than as a sole proprietor or partnership, plus there will be more admin. And while you can have people buy into the business, you can’t issue shares to them.

LLC structure offers plenty of legal protection, but some extra work on admin and tax

You can change your business structure

You’re not locked into one structure forever. A lot of businesses start out as sole proprietorships or partnerships and grow into LLCs, LLPs, or corporations. You might change your business structure if you start getting bigger and doing more complex projects which carry a greater financial or legal risk for you.

Where do franchises fit?

If you buy into a franchise, you don’t automatically become part of their business. You form your own business and enter into a deal with the franchisor. You may be able to choose your own business structure, or the franchise agreement may require it to be set up in a specific way, such as an LLC.

Chapter 9: Registering a business

There is some paperwork to file before you can launch your business. Here’s how to register a business with the right authorities and keep out of trouble.

Read chapter 9

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