Incorporating Your Business Or Not

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SMEs must select the legal structure that will best suit the needs of their particular business. A common misconception that one can only do business as a registered “close corporation” faces many upcoming and already existing entrepreneurs. The truth is that the legal structure of your business depends on your business and circumstances. While it may be reasonable for a large fishing company to register as a private limited company (Pty) it may not be the case with a small painting business with a monthly turnover of say N$10 000. Such an SME may not necessarily need to incorporate as either a pty or a c.c. It may be reasonable for such business to trade as a sole trader at first. To be a sole trader, one normally only has to register with the local municipality. There are three principal types of business structure: the proprietorship, the partnership and the corporation. Each has its advantages and disadvantages, which will be reviewed. Sole Proprietorship The sole proprietorship is usually defined as a business owned and operated by one person. To establish this form of business, one need only (in Erongo) register with the local authority. This is the most common form of small business organization. Advantages Ease of Formation. A sole proprietorship is the easiest and least expensive form of a small business to begin, as well the one with the fewest legal restrictions. No government approval is needed to begin operation. If the business is in your own name, just open the door and start. Sole Ownership. The proprietor shares the profits with no one, and the decision-making is vested in one person. Control. The sole proprietor is in complete control of his or her business. Flexibility. Management can quickly respond to the needs of the business and can make the day-to-day decisions so often critical to a new business’s success. Freedom from Government Control. There are no special taxes for this form of business, Profits become the owner’s personal income and are taxed as such. Disadvantages Unlimited Liability. The sole proprietor is responsible for the full amount of business debts. These could exceed the proprietor’s total investment. Be aware that this liability extends to all the proprietor’s assets, including his or her home. This is the risky part of being a sole proprietor; your personal assets may be attached on defaulting a loan payment. Less Available Capital. Capital is limited to the owner’s personal assets and the funds the owner can borrow. Hence, this form of business ordinarily has less capital available than the other forms. Also, it is usually more difficult for a sole proprietor to borrow money for the business. Unstable Business Life. The business may be crippled or terminated upon the illness or death of the owner. There is usually a lack of continuity upon the demise of the sole proprietor, and his/her death may be the death of the business as well. Experience Limitation. Numerous researches have shown that single owners operating with no or few employees are often limited in experience and viewpoint compared to those in the other forms of business. Partnership A partnership is an association of two or more people as co-owners of a business for profit. Although not required by law, written articles of partnership are customary and highly recommended. These articles of agreement state the financial, material and managerial contributions to the business by each owner. The articles should clearly spell out the role of each partner and the share of the profits each will receive. There should be provisions in the articles both for dissolving the partnership and for buying out one or more of the partners. Partnerships may also be formed as limited partnerships, in which the limited partner risks only an agreed-upon investment in the business. The liability of limited partners is restricted as long as they do not participate in the management of the business. The service of an attorney who specializes in drawing up articles of partnership is essential to start this form of business. Advantages Ease of Formation. While hardly as easy to form as a proprietorship, a partnership is easier and less costly to form than a corporation. Flexibility. The partnership is more flexible than a corporation, but less flexible than a proprietorship. Financing. Capital is easier to obtain for a partnership than for a proprietorship. There is more than one owner to draw upon for funds. Freedom from Government Control. There are no special taxes on a partnership. The partners pay personal taxes on the profits. Skills and Experience. The skills and experience of all partners are available to assist in decision-making. Disadvantages Unlimited Liability. Each general partner is liable for the business debts incurred by the other(s) and by the business in general. Unstable Business Life. Upon death of one partner, the partnership terminates. Rights of survival exist, so buy-out terms must be stated in a written agreement. Long-Term Financing. Partnerships cannot obtain long-term or, for that matter, short-term financing as readily as can a corporation. Disposal of Interest. It is often difficult to dispose of a partner’s interest in the business. As indicated above, partnership articles should contain a buy-out agreement. Corporation The term corporation comes from the Latin word “corpus” which means body. A corporation is a body – it is a legal person in the eyes of the law. It can bring lawsuits, can buy and sell property, contract, be taxed and even commit crimes. Its most notable feature: a corporation protects its owners from personal liability for corporate debts and obligations within limits. The corporation is considered an artificially created legal entity that that exists separate and apart from those individuals who created it and carry on its operations . It is the most complex of the three forms of business. A corporation can only be formed by authority of the state government, in Namibia under the Ministry of Trade and Industry. Two main types of corporations are close corporations and private limited companies. Advantages Separate Legal Existence. The corporation is distinct from the individuals who own it. Limited Liability. Individual shareholders are not liable for debts of the corporation. Ownership Readily Transferable. Owners invest in shares of the business, which can be bought and sold. Stable and Relatively Permanent. Death of a shareholder does not end the business. Relatively Easy to Secure Funds. The foundation of investors’ stock purchases gives confidence to lenders of the corporation’s stability. Delegated Authority of Management. A board of directors and officers give structure to decision making. Skills and Expertise Available from Many. Boards of directors usually are made up of members with a wide variety of perspectives, in addition to their interest in the specific corporation. Disadvantages Extensive Government Regulation. Corporations must be registered with state government and are subject to more extensive regulation by local and federal government than are solely owned businesses or partnerships. Complicated Tax Reporting. Taxation of corporations is totally different from taxation of individuals. Taxation. Profits are subject to corporate tax . Limited Incentive. If management does not share in the profits, there is usually less incentive. Expensive to Form and Maintain. Forming a corporation usually requires professional help to draft Articles of Incorporation and other documents, and on tax and legal matters throughout the corporation’s existence. – Frank Tagarira is a Small Business Development Consultant. (He studied with ACCA-Glasgow-UK).