When setting up your business, it is essential to choose the right format at the outset to avoid administrative, financial, and legal difficulties as your business grows. Each type of business entity has its own distinct advantages and disadvantages, and before choosing a business structure, you will need to consider the nature, size, ownership, tax implications, and growth potential of your business.
Being an ideal structure for a small business where the sole trader does not anticipate a big turnover or growth in the operations of the business, there is very little administration and relatively few costs involved in setting up a sole proprietorship. If you’re planning to operate as a sole proprietor, be sure to take a longer-term view of the expected trajectory of your business. If it is likely that your business will expand to the extent that you will need to bring partners or shareholders into the business, setting out as a sole proprietor may not be the most appropriate option.
It is important to note that partners in a partnership agreement have what is referred to as unlimited liability, meaning that each partner remains personally liable for the debts of the business. In terms of legislation, only one shareholder is required in a private company with shareholding limited to a maximum of 50 shareholders, keeping in mind that private companies are prohibited from offering securities to the public or registering on the stock exchange.
Generally speaking, a private company entity is ideal for more complex business, which anticipates long-term growth, faces higher risks, and anticipates hiring more employees down the line. This type of structure can also make a company seem more professional and attract a higher calibre of clients as well as investors.