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SMEs Chat: Pick the right business type, structure

“Unfortunately, there seems to be far more opportunity out there than ability . . . We should remember that good fortune often happens when opportunity meets with preparation.” — Thomas A. Edison

PHILLIP CHICHONI

As we get into the New Year, many people are eager to get into business and become their own bosses in 2016. A question that many potential entrepreneurs and new business owners often worry about is “What structure should my business take?”

informal-traders

Thousands of small businesses operate informally. Some think formalisation is expensive while others do not know anything about all the choices available. However, many have lost a lot of potential business that could have taken their enterprises to the next level because they have no formal structure.

Small businesses that operate informally have a difficult time getting contracts from established companies because of the lack of the right structure and proper documentation.

There are four basic types of business structures that you can choose from, namely sole proprietor, partnership, private limited company and private business corporation. I will outline the advantages and disadvantages of each so that you can make the right choice for your type of business.

Sole proprietorship
This is the most basic, as it requires no paperwork. Most informal and micro businesses are sole proprietorships. This also includes people who do consultancy work. Because there is no legal registration required, this structure is appropriate for new entrepreneurs who are just starting out and have no resources to facilitate business registration. You do not have to register a business name; you can use your own. The disadvantage is that you are personally responsible for the business’s liabilities, such as debts and employee claims. Further, you will have difficulties getting contracts from bigger businesses, which prefer to deal with registered companies. Financiers are also not willing to invest in sole proprietorships.

Even if you are a sole trader, you will still need to get things like tax clearance, in your personal name, as well as proper licences, which are mandatory for your type of business (liquor, city health, etc).

Partnership
Partnerships are just like sole proprietorships, except that two or more people would be invested in the business. Although partnerships require no formal registration, it is wise to have a written agreement in case of future disputes, which may turn nasty and may require the intervention of the courts.

The liabilities of the business are shared personally between the partners. The advantage of a partnership is that there will be a bigger investment into the business as two or more people pool their resources together.

Private limited company

This is the most common business structure. The popularity of the company arises from the principle of limited liability. This means the liabilities of the business will not encroach into the members’ personal assets. A company can be sued and liquidated without shareholders’ personal assets being touched, unless there has been some form of fraud or improper conduct.

Company law and regulations are well-documented and therefore all institutions and organisations feel at ease doing business with a registered company.

The disadvantage of a company is the cost of registration, the need to comply with the statutory requirements of submitting returns, maintaining records, and ensuring that the company is legally constituted at all times.

Private business corporation
If you want to enjoy the advantages of a company but without incurring the high costs, then a private business corporation is the right choice for you. It has limited liability, can sue and be sued and is accepted by most instititutions and organisations. It can get tax registration and tax clearance, VAT registration if it meets the threshold and can participate in government and private tenders just like a company. The cost of setting up a private business corporation (PBC) is low and there are no complicated statutory returns to be submitted like those for a company. In fact, the PBC was set up to help small businesses formalise without high costs and too much paperwork. When the business grows, you can easily upgrade your PBC into a company, keeping the same name.

So, there you are. Weigh your options and decide which is the most appropriate structure for your business. My advice is to formalise your business as soon as possible in order to enjoy the opportunities that are only available to formal businesses.

Remember, whatever structure you decide on, you are still required to register with Zimra and pay your taxes. Local authorities also expect you to buy business licences and pay appropriate levies.
Until next time, keep on accelerating your growth.

Phillip Chichoni is a consultant who helps SMEs and entrepreneurs build sustainable businesses. You may contact him by email, chichonip@smebusinesslink.com. You can also visit http://smebusinesslink.com 

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