If you are setting up a new enterprise there are a number of factors to consider and choices to make. One of the most important decisions is the structure of the business.
Choosing the right business structure depends on many things such as:
- The kind of business you are planning to set up.
- The number of people you will have working with you.
- Whether you would be working with a partner or as a sole businessman.
However, choosing a structure doesn’t bind a business to carry on with the same structure throughout its existence. As the business grows or expands, the business owner can change the structure as needed. Depending on the type of structure, this can be easy or very difficult.
Here are the 4 types of business structures you can choose, as well as the pros and cons of each type.
A Sole Trader is one of the most simple and inexpensive forms of business structures, where the business owner works independently. In this kind of business structure, traders can work under their own name or choose a suitable name for their business.
This business structure is a partnership between two or more people to run the business together as partners.
This type of business structure is a legal entity with shareholders investing and holding partial ownership, while the company is run by directors.
This business structure is set up for the benefit of others. Often family businesses go for this structure so other family members are made beneficiaries without any direct involvement with the business.
A business owner needs to be very careful when choosing a business structure as each business structures may affect the business in different ways. Such as:
- The tax you’re entitled to pay.
- Protection of your assets.
- Business costs.
- Your value in the market.
Pros and Cons of a Sole Trader Business Structure
- Easy and inexpensive to set up.
- Minimal legal paperwork and reporting.
- Easy to change the business structure at a later stage.
- Complete control over the business and earns income and profit.
- A Sole Trader pays income tax at personal tax rates.
- The income earned by the business is treated as Sole Trader’s own money.
- Business assets and personal assets are both at risk if the business fails.
- No support and the business may fail easily if you are unable to perform alone.
- Fewer options for financing.
Pros and Cons of Partnership Business Structure
- Partners work together and share profit and loss as a team.
- Simple setup, paperwork, and reporting.
- Partners pay individual taxes based on their own partnership earning and profit.
- Multiple partners can raise capital.
- More collaboration and support for business.
- Easy to cease or depart from the business if needed.
- Partners are not treated as employees and are entitled to their share of profit.
- Each partner is equally responsible for any loss incurred by a partner or employee.
- Potential disconnects in terms of profit, power, control and business plan.
- Each partner is liable for business debts and loans.
Pros and Cons of Company Business Structure
- Generally positive acceptance in the market.
- Owners and shareholders are not directly responsible or liable for any loss, the company is.
- Better chance of raising funds in case of financial requisite.
- Ownership can be transferred effortlessly.
- Profits can be reinvested in the company.
- Takes significant amount of time and capital to set up.
- Shareholders can’t be held responsible for any loss of the company.
- High-maintenance record keeping, paperwork, and legal formalities.
- Increased risk of legal issues.
Pros and Cons of Trust Business Structure
- Easier to distribute income.
- Acts more privately than a company structure.
- Assets are protected and secure.
- Set up and maintentance is expensive and time consuming.
- Many legal liabilities to consider.
- Difficult to make changes to the company once it’s set up.
- Tax implications for reinvesting profits into the company.
Consider the pros and cons of all the types of business structures before you make a final decision. It is also advised to consult an expert to get more information on which structure would best suit your business needs.