1: Choose the right form of business

Learn the various business structures and how to make the right choice. When starting a new business, one of the first decisions to make is the type of business organisation that will be used in operating the business.

Although there are a few options to choose from, often the decision is between using a sole proprietorship or limited partnership, where the legal identity of the business and the individual are the same, or setting up a private limited company, which can offer many flexible options in terms of structure ownership, but is a distinct legal entity for liability purposes.

Making the right choice

As a founder, you should consider the needs of your business carefully. Choose the structure that will work for you now, but more importantly, make sure it will work in the years to come. The industry you are entering may itself be an important factor in deciding your business structure, but the right organisation form depends on several other factors, including:

• the cost of formation, which will vary depending on the type of business organisation
• whether the organisation will be responsible for paying profit tax or whether any tax liability will flow through to the owners, such as in a sole proprietorship or a partnership
• the potential liability for things that can go wrong in the business – a sole proprietor and partners in a partnership can face personal liability while the sole shareholder of a private limited company, under normal circumstances, would not.

As with anything in life, choosing a legal structure requires trade-offs. The simpler structures (sole proprietorship or partnership) are cheaper and easier to set up but less flexible in the long term. Incorporating a private limited company is comparatively more complicated and more expensive (however still relatively cheap), but if your startup does turn into the next Instagram, you will be grateful for your foresight.

“The choice of business structure can determine success or failure as it affects many aspects of a business.”