Business structures and what you need to know about them

For any one person or group of people considering starting a business, it is important to know which organisational structure will work best for your business idea.

Company structure, also known as a legal business entity, dictates your relationship with governing bodies and internal operations and, in some cases, even the business names. Also, it can affect your legal liabilities, costs, and taxation.

There are four main types of business entities

• Sole proprietorship
• Partnership
• Corporation
• Limited liability company

Sole proprietorship

This business structure is controlled by a single individual. In this case, the business does not have a separate legal identity from its owner. You sink or swim with the business!

Hence, whatever happens to the business happens to the owner and vice versa. For example, where a sole proprietorship goes into debt, the owner’s assets are liable to be used to offset such. Also, if a crime is committed in the course of the business, the owner is personally liable to be charged and convicted; and when the proprietor dies, in most instances, so does the business.

As regards taxes, the proprietor will only pay personal income tax in most countries.

Businesses suited to this structure include Freelance professionals, retail trading activities and other one-man business entities.

Partnerships

A partnership is formed when two or more individuals initiate and control a business according to their agreements.

Just like the sole proprietorship, the liabilities of a partnership are personal, and each partner’s property may be used to offset any debt or contractual liability of the partnership.

A partnership ends at the demise of one of its owners or when it comes to a consensual end.

This business model exists in three forms;

• General partnership is where two or more people have equal shares of responsibility, profits and losses. It is formally formed where a partnership agreement containing the names of the partners, nature of business and duration of the partnership is signed. This form of partnership is not a separate legal entity from its owners, and so all liability is shared equally amongst them. This also means that taxation is calculated from each partner’s personal income.

• Limited liability partnership occurs when the liability of the partners is limited to their individual actions, so they are not equally liable for the business obligations. In some jurisdictions, such partners will be responsible for partnership debts but not those that arise from the negligence of other partners. In Nigeria, South Africa, and Kenya, tax is paid as personal income tax.

NB: Limited Liability Partnerships are not recognised in Ghana.

• Limited partnership combines both general and limited liability partnerships. General partners have the same responsibilities and liabilities here as they do in general partnerships, while limited partners are limited only to their investments and have no decision-making rights. Tax is paid as personal income in most countries, including Nigeria, Kenya, Ghana and South Africa

Businesses suited to this model include law firms, audit/tax firms, etc.

Limited liability company

This is the most common structure of registered companies across Africa. In this structure, the company is a separate legal entity with the ability to own property, sue and be sued in its own name, and enter into contractual arrangements by itself.

The company’s liabilities are limited to the shares of each individual subscriber or member, and the members are not held personally liable for the debts and contracts entered into by the company.

To form a limited liability company, you will be required to file a memorandum of association and articles of association with the country’s regulator.

One significant business type suited to this structure is a Startup company

Corporation/Public Companies

This is a separate legal entity distinct from its owners. Such owners do not bear any personal liability for debts and obligations. It exists outside the demise of its owners and has a centralised management which allows it to run without the daily interference of its owners.

Owners are usually referred to as investors. This is a more complex structure that is governed by law and requires extensive record keeping. Capital can be raised by selling stocks and securities.

They can also be referred to as public companies in Ghana, Nigeria, Kenya and South Africa. Taxes are usually paid as Corporate Income Tax.

Businesses suited to this structure: Large Corporations, banks, insurance companies, etc.

Now that you know the various business structures, we’ll let you in on the easiest way to set them up.

Simply visit norebase.com to register any business structure across Africa and the U.S.