Throughout most parts of world, three predominant main types of legal business forms are used to run small business organisations.
Countries choose different ways of organising the legal structure of business
life. Therefore, you have to contact your local authority in order to find out
how your country organises the business society.
Three main legal business forms
Throughout most parts of world, three
predominant main types of legal forms are used to run small business
organisations. These business forms are as follows:
- Sole proprietorship - where generally only one person funds the business
- Partnerships - where two or more people band together to finance or run
- Corporations/limited companies - where it is possible for a few
friends/family members or up to many thousands to subscribe for a share in
Legal business form: Sole proprietorship
The vast majority of new businesses are set up as sole proprietors. The form
is normally formality-free; there are no rules about the records you have to
keep. Nor is there a requirement for your accounts to be audited or for
financial information on your business to be filed at the registrar of
companies. You still have to pay tax from the profit.
The biggest disadvantage of being a sole trader is that you are totally
responsible for any debts your business incurs. If you go bankrupt, your
creditors are entitled to size and sell your possessions - personal as well as
Legal business form: Partnerships
Partnerships are effectively collections of sole proprietors and, thus,
there are legal issues related to personal liability. There are very few
restrictions to setting up a business with another person (or persons) in
partnership, and several definite advantages. By pooling resources together you
may have more capital. You will be bringing several sets of skills to the
business, and if you get ill the business can still carry on.
The biggest disadvantage is if your partner makes a business mistake. This could
perhaps be by your partner signing a disastrous contract without your knowledge
or consent. Every member of the partnership must shoulder the consequences
equally. Under these circumstances your personal assets could be taken in order
to pay the creditors - even though the mistake was by no fault of your own.
Legal business form: Limited Liability Companies
As the name suggests, in this form of business your liability is limited to
the amount you contribute by way of share capital.
A Limited Liability Company is a separate legal entity, distinct from both its
shareholders, directors and managers. The liability of the shareholders is
limited to the amount paid or unpaid on issued share capital.
However, many restrictions are put on the company. It must maintain certain
books of accounts. Appoint an auditor and file an annual return with the
registrar of companies which includes the accounts as well as details of
directors and mortgages.
The biggest disadvantage is that it is more expensive to set up and there are
more rules to follow.
How you actually register your company depends on the country you live in.
Contact the authority for further information.
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