A lot of Start-ups are confused as to the appropriate corporate structure to use for their business. The decision on how to form your business will influence several aspects of the business which includes how profits and losses are shared, how the business pays taxes and who runs the business. Factors that you will consider before making a choice of corporate structure for your business include purpose/object of the business, cost of registering the business and cost of maintaining it, capital, taxation, liability, management et cetera.
If you want to run a one-man business then Business Name will be suitable for you. Incorporation of company requires at least two Subscribers (members). Formation of private company requires at least 2 members and a maximum of 50 members while a public company requires at least 2 members and has no maximum number of members. Thus, where the intending shareholders of a proposed company are more than 50, the only option is to incorporate a Public Limited Liability Company.
The purpose/object of the business is a very important consideration in making a choice of corporate structure for business. There are businesses that can be transacted using a business name. Such businesses include small businesses that require small capital and in most cases are run by one or two persons at a low scale. If you want to run certain businesses like banking, insurance, mortgage, the law requires that a company be formed in order to run the business. Also, any association, group or partnership carrying on business for profit and with a membership exceeding 20 must be registered as a company, with the exception of Co-operative Societies, Partnership firms of Lawyers and Accountants.
Business Name is easy and cheaper to set up and also easy to manage. A company, however, cost more to set up and run. Also, a Sole Proprietor who registers a business name is not required to pay tax on the business but pays personal income tax. A company, on the other hand, is required to pay companies income tax.
Perhaps the main advantages of a limited liability company over business name are separate legal personality and limited liability. A registered company is recognized by law as a “person” with such rights and duties as are attributed to it by law. In a limited liability company, Shareholders’ personal assets cannot be used to pay the Company’s debt. This is because a company is considered to be a separate legal entity, different from the members of the company. In business name, the owners are personally liable for business debts.
Incorporated Companies have perpetual succession. This means that a company does not expire upon the death of its shareholders, directors or officers. But where a Sole Proprietor dies, the business dies with him. The debt of a partner can also lead to dissolution of a partnership.
If you want to run a large business, you may consider forming a company as that offers many advantages over partnership or sole proprietorship. Also, public companies can easily raise money from the public by selling stock.
Are you nursing the idea of registering your business? Are you confused on how to go about it? You can seek professional legal advice.