How to make the “right” legal decisions for your new business

A decision must be made about the legal structure of the business. That is, will it be a sole proprietorship, a partnership, or a corporation?

On this page we have just given you the basic gist of each type of legal structure. To understand each type of legal structure in much more detail, you could go though “How to incorporate?” It is complete guide on the different types of legal structures and the legal procedure of starting up your company.

Sole Proprietorship: (business owned by one person)

Advantages:

Ease of formation

Sole ownership of profits

Control and decision making vested in the hands of the owner

Flexibility

Freedom from government control and taxation.

Disadvantages:

Unlimited liability

Unstable business life if the owner should die

Less available capital in other types of business structures

Relative difficulty in obtaining long-term financing

Relatively limited viewpoint and experience of proprietor

Partnerships: (business owned by two or more persons)

Advantages:

Ease of formation

Direct rewards

Growth and performance facilitated

Flexibility

Relative freedom from government control and special taxation

Disadvantages:

Unlimited liability of at least one partner

Unstable life of business (e.g. if one owner should die)

Difficulty in obtaining large sums of capital

Firm bound by the acts of one partner as agent

Difficulty in disposing of partnership interest (e.g. if one partner wanted to buy out the other partner)

Corporations: (a legal entity distinct from those parties or individuals that own it)

Advantages:

A shareholder or partner’s liability is limited to a fixed investment amount

Ownership is readily transferable

Separate legal existence

Ease in securing capital from many investors

Ability of the corporation to draw on experience and skills of more than one individual

Disadvantages:

Activities are limited by the charter and various laws

Extensive government regulations are required

Less incentive for manager if he does not share profits

Expense of forming a corporation is high

Considering the different advantages and disadvantages of the various structures, you could choose a legal structure you would like to go for.