Business Formation

The Legal Format

When setting up a new business you will need to decide what legal format you want to operate under. This is one of the most important decisions you need to take at an early stage as this will determine how you will operate your business in the future.

To determine what legal format is best for you, you need, first of all, to understand some of the basic differences. The most common legal formats for businesses are:

  • Sole Trader
  • Partnerships
  • Private Limited Liability Companies
  • Cooperatives

Sole Trader

Sole Traders need to register with the Inland Revenue as self-employed. These can start trading straight away as long as the required permits and registrations are carried out.

Liability / Ifthe business fails, thentheowner is fullyresponsibleforallthe business debts.
Management / The owner is solelyresponsibleforcontrollingthe business. The owner’sword is final.
Finance / Normally, theowner'spersonalmoney.
Profits / Allprofits go totheowner.
Taxes / Self-employed status. Eveniftheownerdoesnotdrawontheprofitstheyarestilltaxed. Lossescan be offsetagainsttaxonotherincome.

Partnerships

Partners need to register with the Inland Revenue as self-employed. You should seek the advice of a lawyer and form a 'Deed of Partnership'. Partnerships can start trading straight away as long as the required permits and registrations are carried out.

Liability / Ifthe business fails, thentheownersarefullyresponsibleforallthe business debts.
Management / The partnersshareresponsibilityforcontrollingthe business.
Finance / Generally, thepartners’ privatefundsprovidetheCompany’sfinances.
Profits / Allprofitsaresharedbetweenthepartners (asagreedwithinthe 'Deed of Partnership').
Taxes / Self-employed status. Evenifthepartnersdonotdrawontheprofitstheyarestilltaxed. Lossescan be offsetagainsttaxonotherincome.

Private Limited Liability Companies (Ltd.)

Companies cannot just start operating but need to follow a predefined process of registration and set-up (Business Registration). It should be noted that a Company is a legal entity in its own right.

Liability / The shareholders' personalassetsareprotectedifthe business fails (Limited Liability). The shareholderscanonlylosewhattheyhaveputintothe business.
Management / The business is controlledbytheBoard of Directors. Eachdirector is heldpersonallyresponsibleforits management and must actintheCompany'sbestinterests.
Finance / Generally, theshareholders’ privatefunds and/or bank facilitiesprovidetheCompany’sfinances.
Profits / Dividendsarepaidtotheshareholders.
Taxes / The Companypaystaxesonitsprofits. Allemployees and directorspaytaxesonincomeearnedthroughwages, salariesorotherforms of remuneration.

Cooperatives

A Cooperative is similar to a Company but its employees, or a large percentage of them, own the Company. A Cooperative cannot just start operating but needs to follow a predefined process of registration and set-up. It should be noted that a cooperative is a legal entity in its own right.

Liability / The shareholders' (employees’) personalassetsareprotectedifthe business fails. The shareholderscanonlylosewhattheyhaveputintothe business.
Management / A Board of Directorscontrolsthe business. Theyareeachheldpersonallyresponsibleforits management and must actintheCooperative’sbestinterests.
Finance / Generally, theshareholders’ personalmoneyor bank facilitiesprovidetheCompanyfinances.
Profits / Dividendsarepaidtotheshareholders.
Taxes / The Cooperativepaystaxesonitsprofits. Allemployees and directorspaytaxesonincomeearnedthroughwages, salariesorotherforms of remuneration.