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Legal Business Structure

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:

  1. Sole proprietorship - where generally only one person funds the business activities
  2. Partnerships - where two or more people band together to finance or run a venture
  3. Corporations/limited companies - where it is possible for a few friends/family members or up to many thousands to subscribe for a share in business ownership

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 business.

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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