Lesson 2: Type of Business
The advantages and disadvantages of each type
The three types of business structure each carry with them inherent advantages and disadvantages for a new small business. While your choice doesn't have to be final, changing the type of business structure often involves additional expense and possibly a change of name. A new small business doesn't need this kind of complication so we'll look at what each type is designed to do and how well it accomplishes its aims. It will then be easier to make an informed decision.
1. Registered Business
The registered business is the least complicated to set up and imposes no requirements on the individual who wants to start a business. You may want to register a business name and open up separate bank accounts for your business but you don't have to. Specific advantages are:
- low cost to set up;
- can be done quickly and easily;
- few formalities and documentation requirements;
- little extra accounting required;
- few additional tax forms;
- flexibility as to what the company does.
- company income is your income - no tax minimization;
- you're responsible and liable for company activities, even if you didn't carry out the activity;
- companies prefer doing business with other companies.
2. Company
The incorporated business is a completely separate entity from the business owner. It has it's own bank account, pays its own taxes and can easily be sold. Specific advantages are:
- you're not responsible or liable for the company's activities if you didn't take part;
- you can arrange your own and the company's finances so that taxes are minimized;
- companies are regarded as more permanent and stable by other companies.
- incorporation is relatively costly and time-consuming;
- most jurisdictions have annual filing, record-keeping and fee requirements;
3. Partnership
The partnership is a separate entity like a company. Specific advantages are:
- you can own a business together with others;
- you can share the work and responsibilities with your partners.
Specific disadvantages are:
- complicated to set up and run;
- dissolving a partnership is difficult;
- it doesn't automatically limit your liability;
- it doesn't automatically let you minimize your taxes.
All three are viable business types and all three will work as a small business. For your particular case, one is going to be the best for the first few years of your business and what you choose will have an impact on how your business develops.
