With the skyrocketing closing of businesses since 2020 and the arrival of COVID, unemployment is commonplace and more and more people are starting up their own businesses. Many people are working from home or earning a living from their hobbies.
A frequent question is whether or not one should register a business and if so, what type of business should your register?
There Are 5 Different Types Of Business Structures
- Sole Proprietorship. A sole proprietorship is when there is a single founder who owns and runs the business.
- Partnership. A partnership is when 2 or more co-owners run a business together.
- Pty Ltd – Proprietary limited company.
- Public Company.
1. Sole Proprietorship
A sole proprietorship is where a single founder owns and runs the business. It is a simple form of business, where the owner is the business. This is how most businesses were run, way back in time. This has changed over the decades but there are some advantages but, I say this with caution.
Advantages Of A Sole Prop
- You can name the business
- You are the sole owner and descision maker
- It is the easiest form of business to set up
- You cintrol the finances and the profit is yours.
Disadvantages of a Sole Prop
- You assume all the businesses risk and your personal assets can be seized to settle the company’s debt
- If you want to add another person to the business, you must first close the Sole Prop. and then start a new business, a Partnership
Example Of A Sole Prop
Someone who starts a home industry baking business, Beauty Salon, Furniture manufacturing etc.. these businesses usually start small and as they grow, more partners come aboard and a new business venture has to be started.
Much like a Sole Prop., a partnership is where two or more people pool their money to build a business.
Advantages of having a partner
The benefits of a Partnership are much the same as a Sole Prop but there are one or two more:-
- You share the finantial burden of running tha business
- You will have more capital on hand
- You will have a better work-home life as there are more people to sharethe workload
Disadvantages of having a partner
Having more capital is great but there are other disadvantages that you should consider. Here are some of the disadvantages of having partners:
- You now have to share the profits
- Everyone is liable for debts nomatter who caused them
- You have to consult and share control of the business with your partner(s)
- There are often differences of opinion on how to do things and this could place strain on the business relationship
- Selling your business could prove difficult if others don’t want to sell.
3. Pty Ltd – Proprietary limited company
A private company, Pty Ltd or proprietary limited company is treated as a separate legal entity. This means that if the company runs into difficulty, in most cases your personal assets would not be affected.
The owners of a Pty Ltd are commonly known as the shareholders.
Advantage of being a Pty Ltd
- Anyone acting recklessly or fraudulently can be personally liable for all or any debts of the Pty Ltd. This means that that there is accounterbility especially if there is more than one shareholder.
- The business is a sperate entity, so this makes it possible foryou to sell your shares in the company while it continues to run smoothly.
- You don’t have to explain your finances and decisions to anyone, other than the other shareholders if there are any.
- Shareholders are typically not liable for company debts, although there are some tax liabilities.
Disadvantages of being a Pty Ltd
Although there are a number of benefits to registering a Pty Ltd, there are also drawbacks, such as:
- There are a large number of legal requirements to be met.
- This type of business can be challenging and expensive to register, although it is not necessarily so.
- This is a private company and you can’t offer shares to the public or list the business on a stock exchange.
- Two shareholders must be at a meeting, except when the company only has one shareholder
- All of your financial statements need to undergo annual auditing. There are some exceptions in the new Companies Act, find out more here.
4. Public Company
A public company is a business that issues securities through an initial public offering (IPO) and trades its stock on at least one stock exchange. The daily trading in the stock exchange of the public company’s stock determines the value of the whole business.
Such a company is known as a Public Company because the public can buy shares in the company, unlike the Pty Ltd where you decide who you sell shares to.
Advantage of publicly traded companies
A public company has benefits, just like any other type of business structure, such as:
- being a public comany offers you more capital to work with.
- Being listed on a stock exchange means that fund managers and traders are keeping an eye on your business. The more interest you have, the more business opportunities will come your way.
- Having shareholder means that the risk is spread proportionately
Disadvantages of publicly traded companies
Here are some of the disadvantages of this type of business structure:
- Setting up a public company is far more difficultcompared to the other types of business structures.
- Making decisions can take significantly longer as with any commitee descision.
- You’ll need to reveal some of your documents and annual accounts are published for inspection to the public. This improves transparency but doesn’t enable you to guard your secrets effectively.
- When you go public, you’re selling the ownership of your company to strangers. It’s challenging to raise the money you need while keeping a 51% majority.
In franchising, a franchise owner partners with a corporate brand to open a business under the brand’s umbrella. The franchisee owns and operates that location using the franchisor’s brand name, logo, products, services and other assets.
Advantage of operating a franchise
- A franchise usually has a positive reputation that you can capitalise on.
- Franchises offer training programmes designed to optimise how you run the business and bring you up to speed quickly.
- If you join a franchise, they also offer ongoing operational support. This ensures you’re not alone when building and growing your business.
Disadvantages of operating as a franchise
Buying into a franchise also comes with issues and drawbacks, such as:
- Buying a franchise, you’ll have to follow the rules, regulations, system operations and directives of the franchise.
- Buying a franchise is more costly and often considered high, sometimes even higher than starting your own business.
- You’ll have to pay royalties to the franchise for the use of their name and systems.
What type of business should you start?
Your needs and the needs of your business will determine which type of business structure will be the best for you. Feel free to switch between types as your business grows.
When starting a business, you can register as a sole proprietor or partnership and gradually grow into a Pty Ltd or public company. Use the different types of business structures to your and your business’s advantage.
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