Common business setup
From a start-up's view, it is simple and unimportant, but success can later create problems which you hardly can imagine, at the starting stage.
It could create a need for finance of debtors, stock, a technical upgrading, bigger premises etc.
To top-up, your liquid capacity, you would search for funding from banks, finance companies or a business partner(s) and, all will scrutinize your business setup.
Commonly used setups are:
1. Sole trader
2. Partnership
3. Company
Each structure has its benefits, drawbacks and with different risks involved.
Starting as a sole trader is the most used option for small business and, is mainly financed by banks. It is the easiest and fastest way, and based on private securities. Banks do not interfere in a business' management but, want to be paid on time. You have a risk of losing your collaterals securities if something goes wrong.
Sole Traders are taxed personally of all profit from their business.
Partnerships have two options:
- Use a silent partner(s) to finance the business without participating in its daily management. A silent partner(s) payment pays through profit or, interest or, a combination.
- Use a working partner(s) to finance the business, which also takes part in the management—the profit shares after an agreement between the Parties.
A partnership has a "written contract" which, governs the closure of the business.
All Partner is personally responsible for the partnership's liabilities, .an taxed like a Sole Trader.
A propriety company is a popular third solution. Its capital is usually a minor amount of, paid-up shares and, the rest of the money is, shareholders' loan or, a bank loan secured by the shareholders. In this way, the shareholders are creditors in the company.
Companies operate after special rules set out by the Government.
Often an estimated value of an existing business can is used as finance for a new company. By using a company set up, the risk for your assets reduces.
For the time being, a company with big profits is taxed lower than the two other options.
Changing a business' setup later is a complicated and expensive exercise.