Choosing a business structure is an essential part of starting your business. When you run a small business, its structure will significantly impact all aspects of its functioning. These range from how you pay your taxes to your business’ growth opportunities. Therefore, you need to choose the most appropriate option based on how you want to run your business and your goals. If you are considering what business structure to choose, this article will outline the pros and cons of the following key structures:
- sole trader business;
- partnership; and
- company.
Additionally, we will provide some advice on choosing the proper structure for you.
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Sole Trader
A sole tradership, also known as a sole proprietorship, is the simplest form of business structure. Typically, this business structure suits individuals who run a small business alone as you can receive all the profits. However, there is little separation between your personal and professional finances.
Becoming a sole trader is also a straightforward process. There is limited paperwork and meagre startup costs. You will pay tax from your personal Inland Revenue Department (IRD) number, which simplifies the taxation process for a sole trader.
Due to the low cost and easy setup, many small businesses operate as sole traders. However, you are personally responsible for your business finances. Therefore you may have to dip into your personal assets if your business faces financial struggles.
Partnership
A partnership is a business co-owned by two or more people. Typically, they own a partnership equally, sharing the business’:
- profits;
- rights;
- responsibilities; and
- losses.
Partnerships are also easy to form. They are relatively cheap and quick to set up. However, you must ensure that you write a comprehensive partnership agreement to govern your relationship. This document should outline all aspects of how the partnership will work, including:
- the rights and responsibilities of each partner;
- guidance on how you should handle disputes; and
- how you can dissolve the partnership.
A business partner could be any person, like a:
- family member;
- friend; or
- co-worker.
However, they will be a hugely important part of your life, and you will share severe stress and challenges with them. You both will be liable for any of the business’ debts.
A partnership business structure may be great for your small business if you have a trustworthy and cooperative partner. You will be able to share the business’ benefits and hardships. A partnership is also a quick and easy business structure to set up. However, you must establish an IRD number for the partnership and write a partnership agreement.
Continue reading this article below the formCompany
A company is the most complicated business structure to create. A company is a separate legal entity, unlike a partnership or sole trader structure. This means that your personal finances and your company finances will be separate. Therefore, you will not be personally liable for any of the company’s debts outside of what you own as a shareholder. This can be good if you do not want your personal finances at risk for your business.
However, companies have extensive startup processes because they are separate legal entities. You will need to register your company with the Companies Office and keep your details up to date. As a result, you will have annual reporting requirements. Therefore, some people may not feel this is necessary for their small business. A company structure can be great if you are concerned about personal liability and want to keep your business separate.
Which Business Structure is Right for Me?
There is no correct answer for what business structure is right for your small business; it depends on your end goals. When making a decision, you should consider:
- what you want for your business;
- how much you are willing to invest in the startup of your business;
- how much personal liability you want for your business financially; and
- if you have a potential business partner in mind.
Key Takeaways
Choosing a business structure for your small business is a huge decision. Each type of business structure has many pros and cons, and your decision will be personal. However, you can also change your business structure over the lifetime of your business as it grows.
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Frequently Asked Questions
A business partner should be someone you trust, and you should work well together. Consider whether you have complementary skills and the same long-term goals.
No, you must go through the formal registration process with the Companies Office. However, this is a straightforward process that you can complete online.
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