Businesses can be organized as sole proprietorships, partnerships and limited companies. What are the implications of the different formats? Let us say that you are Mary Businessperson, planning to set up a catering business. Which of these forms should you adopt? We take a look at the implications of selecting different options.
This page comes under the section Prepare for Your Small Business Startup.
You can do business as "Mary Businessperson", Caterer. No need to register your business name. The only registration needed could be registering your business with your local council. Just go and meet the concerned person at the council office and complete any forms (and pay the fees). Certain businesses (including catering, most likely) might have to register with departments like the health department. Get details from the person you meet at the local council.
When you start making profits, tax people would of course get interested in you and further registrations and formalities might become necessary. And if you employ people, employment laws might impose additional requirements. Until then just focus on your business.
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If you so much as add a word or two to your name, however, business name registration would become necessary. "Mary Businessperson & Company" for example. You'd have to check that nobody else is doing business in the same name. You'd also have to tell the authorities such things as whether it is just Mary Businessperson or whether there is indeed some company.
That brings us to the topic of partnership.
You can persuade Joanna Marketperson, your friend, to join you in the business. While you, Mary Businessperson, will do the actual catering, Joanna will do the work of getting orders. She has excellent contacts among, say, the HR managers of companies nearby that need catering services for their canteens. The two of you could build an excellent business together. And Joanna will also bring in some money to buy needed equipment.
From registration point of view, however, things get a little complicated. You have to register not only the name of the business but also the partnership itself. And to avoid unnecessary disputes, it would also be best to meet a partnership lawyer and set down exactly how the partnership would be run. Who will do what, how much money each will invest, how the profits (or, horror of horrors, losses) would be shared and how the dues would be settled in case one of you dies or retires from the business.
Both the above forms of doing business, sole trader and partnership, have a big problem. Even if you keep business and personal accounts quite separate, your creditors can get at your personal assets if the business assets prove insufficient to meet their claims.
That's going too far, you might think. So what do you do? Don't do any business at all?
Well, there's an option. You could incorporate a company. Company incorporation is no simple matter, however. Unless you are a company lawyer, you are going to find things extremely complex. So many papers and formalities are involved. There are additional, recurring, formalities to be complied with year after year so long as your company is in existence.
So why go to all the trouble?
The answer, and a resounding one at that, is that your personal assets are no more at risk (unless you knowingly risk them). The company is a separate legal entity that has to take care of its own liabilities. If it can't meet the liabilities, the creditors lose. They can't touch you unless you have given a personal guarantee or security (or committed some kind of fraud).
There is one thing however. If you had agreed to take a thousand shares at $1 per share, and has paid only 75 cents per share (say by bringing in only $750), you'd have to pay up the unpaid amount (the remaining $250). Beyond that, your personal property is safe.
There are also taxation issues. As a sole trader or partner, your business income would be clubbed with your other income and that total would be taxed at the rates applicable to you.
The company, on the other hand, pays its own tax. If it pays you a dividend, you might be liable to pay tax on your dividend income too.
The company form adds much credibility and respectability for the business. M & J Caterers, Inc. sounds so much more impressive. You might find it easier to get catering contracts from big corporations.
So the option is up to you. Better consult a tax lawyer, however.
Return to Section Main Page How to Prepare for a Small Business Start
The basics of sole proprietorship, partnership, LLC, S-Corp, and C-Corp taxation.
How to protect your personal assets from lawsuits against your business.
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