Before registering your business, you need to decide wisely what legal form you will choose. There are several aspects you should consider when making this decision, such as your available resources, partners, and your expansion plans.
However, you first need to understand the common business legal forms; therefore, we have prepared this article to give you a general idea about each one of them.
Common Legal Forms:
1) Sole proprietorship: This is a business structure in which one person, the owner, manages the firm alone. Legally, the firm and the owner do not have separate legal personalities. In other words, the owner alone takes full legal responsibility for whatever happens within the firm. Thus, the owner receives all the profits and pays taxes on their personal returns, which means that there are no additional taxes, as in corporations.
On the other hand, the owner is accountable for all the losses. Sole proprietorships could cause high risks for the owner because owners have unlimited liability. Unlimited liability indicates that in case the firm cannot meet its debts, the owner is obliged to pay from their personal money, even if it involves selling personal assets like their car.
However, the best thing about sole proprietorships is that they have low costs and offer independence. Sole proprietorships represent a large percentage of current businesses, mostly in the service industry.
When to consider sole proprietorship? It will suit you if you are planning to start a small business by yourself without any employees or with a small number of them. It is also the most suitable choice if you start with your personal funds and do not have plans to expand dramatically.
Moreover, sole proprietorships’ ease of dissolution makes it the best option if you are not willing to continue with this business for a long time or if you want it to end by your death. However, bear in mind that you will have to carry much responsibility on your own, and you will need to learn numerous skills to manage your business effectively.
2) Partnerships: It is similar to sole proprietorships in many ways, yet the main difference is that partnerships involve more than one owner. Partnerships provide more expansion opportunities and gather more funds. Also, they allow several owners to participate in the firm’s management with their diverse set of skills.
However, owners in partnerships also have limited liability, and each owner is liable for the whole sum of money; consequently, they may pay from their personal money to cover the debt of other partners.
When to consider a partnership? If you are planning to start a small or a medium-sized business with people whom you can trust, then you probably should choose a partnership. Partnerships are usually convenient if you are starting a law firm or accounting office.
3) Corporation: This is widely known as the most profitable form of business. A corporation has a juristic personality separate from its owners, which means that it is treated as an individual who has rights and obligations before the law.
Ownership in corporations arrives in the form of shares, either ordinary shares or preferred shares. And its owners are known as shareholders. Each shareholder can receive dividends as a return, and they can realize gains by selling their shares at a price higher than the initial purchasing price.
Corporations have a large and complex structure that includes many employees. That is why usually its owners are not the managers; Instead, they elect a board of directors who then creates the firm’s general policies and hire a CEO to implement these policies. Corporations can gather large amounts of funds from share issuance, and they guarantee continuity for the long term.
When to consider a corporation? They are your best option if you are entering a major industry sector and can ensure that many people will be willing to buy your shares. Moreover, you need to have strong experience in the business field and consultants to help you along the way.
Conclusion: Now that you have a general idea about each legal form, try to assess your resources and your plans to come up with the best choice. Also, note that you should consult a lawyer before taking any actual step.