Factors Affecting Choice of Legal Structure of Your Business

Your business should be set up based on the legal structure that is most appropriate.

There are some factors which you may consider before you settle for any particular business legal structure. The reason for putting the factors into consideration is that, once you choose your legal structure, it will cost you time and money to change it. So, you should not take this lightly. The factors to be considered include the following:

Capital

What is the capital requirement for your business? Can you start your business with just a little capital or it is going to be capital intensive? What are the sources of finance you are looking at for the business? For a home based business or a business that will not require much capital or external funding; sole proprietorship can be suitable for you. But if the business requires huge amount of capital, there might be a need for external source of finance. This can be from friends, relations, banks or other investors/partners. In this case, entering into Partnership with trusted people that have the money can be a good choice. If this option is not suitable, establishing a private company will be an alternative.

Control/Management

Your personality cannot be separated from your business. The type of person you are will largely determine your business legal structure. If you are the type that always like to be in control; that is, you derive pleasure in having complete ownership and you are not ready to let go, your best choice is to go for sole proprietorship. If you pay less importance on who controls the business, it will be easier to get funds from potential investors who will like to have equity in your business. Establishing a private company is good in this case.

Liability

Business comes with risks. We know that every entrepreneur is a risk taker but the degree of risk we want to take differs. Are you ready to personally shoulder the liabilities of your business or you want to limit your liability to certain level? For sole proprietorship, the owner is responsible for all the liabilities of the business in case of eventuality. If the assets of the business cannot pay off the liabilities of the business, you have to be personally responsible. Under Partnership, the losses or liabilities from the business will be shared in agreed ratio as contained in the partnership deed. But if you register your business as a limited liability company, your liability will be limited to the amount of your shares in the company. Even if the assets of the company cannot pay off the entire liability, you are not under any obligation to pay with your personal property except in a situation where you have pledged your personal property as collateral for loan.

Read Also: How to Start a Business: 16 Steps to Follow

Taxation

Choosing appropriate legal structure can be a good way to planning your tax. That is one of the reasons I mentioned earlier that you should contact an accountant for necessary advice. You are taxed differently under each legal structure you choose for your business. As a sole proprietorship, your business does not pay tax on profits, instead you will be taxed on the income you derive from the business; this is the same with Partnership. But if you incorporate your business as a limited liability company, your profit will be taxed under Company Income Tax Act unlike the case of sole proprietorship and partnership who are taxed under Personal Income Act. These two tax laws have their tax rates. Therefore, choosing the right legal business structure can bring some tax benefits to you.

Purpose of the business

What is your purpose for setting up the business? This will be defined in your Mission Statement in your business plan. How will you describe success? What gives you fulfilment in life?  Now that you are in your own business, you need to take all these into consideration right from the start of your business. It should not be that you later discover that your investors do not share the same dream with you. That time, it might be too late to make correction.

Cost of Business Structure

Every business legal structure has certain costs which are peculiar. This begins with the registration to documentation, filing of returns etc. To register a business name as a sole proprietorship, you can handle this by yourself if you have the time and this can be done with a budget less than twenty thousand naira. But if you want to register a limited liability company, you need a lawyer or an accountant to handle this for you. Apart from the fee they charge you, it is more expensive to incorporate a company. If you can’t afford the cost of incorporating a company, you can actually start your business by registering it as a business name. This will, at least, ensure that the name is secured. You can later change the legal structure to a limited liability company.

Potential and future Investment

You should look beyond the present. Your business may be small today but when your business starts to grow, you will need more capital. Your business legal structure can limit the amount of money you can raise. Your business plan should serve as a guide if well prepared.

Transferability of ownership

Investors prefer putting their money in a business where ownership can be easily transferred if necessary. If you want to attract this class of investors, public limited liability company will be the best option. This will allow the investors sell their shares in the company to another interested third party.

Read Also: Choosing A Legal Structure of A Business

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