Driving your Business: Choosing the correct Business Vehicle: By Stanecia Davis
The business journey, just like any other journey, requires the right business vehicle to get you to your desired destination. “Business vehicle”, in this context, refers to the type of business that is ideal for you at the current stage of your business or business idea. Notably, just like how you can upgrade your car as your finances and needs increase, your business vehicle can undergo a similar transition. In this blog, I will outline a synopsis of the pros and cons of the sole proprietorship, the general partnership and the company limited by shares, whether private or public.
In essence, a sole proprietorship is a “one-man/one-woman show”. You are the boss and all profits belong to you. Similarly, all losses are on you. There is no differentiation between your assets and that of the business and thus this is a risk factor to consider. It is important to note that a sole proprietorship does not mean you have no employees; employees are agents of your business rather than actually owning a portion of your business.
The sole proprietorship is an excellent avenue when the product/service offered is simple enough for you to create with minimum funding and human output. Of course, the amount of funding available to an individual varies but on average, new entrepreneurs struggle with funding and thus this tends to be a natural con of this particular vehicle.
The gas for this vehicle is expensive. So when you’re the only one footing the bill, the strain can be enormous.
The bright side is the independence that comes with sole proprietorship. It’s your way, your terms, and your decisions. The definition of being your own boss.
Pros: You are the boss, very little regulation (freedom), privacy in affairs Cons: Limited access to funding, no protection from liability, no perpetual succession
A partnership is a profit making mechanism that can range from two (2) to twenty (20) persons.
The partners can place terms on which they wish to operate in a partnership agreement. Where there is no written/express partnership agreement, it falls to what I term a “default setting” agreement. This is what lawyers call the common law formulation of a partnership agreement, in other words a standard of what a partnership is expected to be. In order to avoid falling to the default setting, it is best to craft your own partnership agreement that is uniquely crafted for your partnership.
The default setting sets profits and losses in equal shares amongst partners and stipulates that all partners have an administrative role in the firm (A partnership is generally referred to as a firm). However, there can be partners that only contribute capital and there can be one partner that deals with administrative affairs as it is up to partners to decide.
Like a sole proprietorship, there is no differentiation between your assets and that of the business, hence this risk factor is still present.
Sidenote: A partnership agreement can be oral, however, the typical risk of “he said/she said” can arise and thus to mitigate against doubt, a written partnership agreement is recommended.
Pros: More access to funding and skills as more persons are involved, still a great deal of privacy, little regulation, fiduciary relationship amongst partners
Cons: More than one person is not involved in the process and therefore disputes are likely, no perpetual succession, fiduciary relationship amongst partners, no protection from liability
Company Limited by Shares
III(a). A company limited by shares is the ideal vehicle for those who wish to engage in activity which generates profit for distribution to the members or shareholders. Shareholders are basically owners in a portion of the company based on the proportion of shares they own. The shareholders buying shares is what creates capital (money) to grow the business. However, management of a company in not vested in the shareholders but directors who may also be shareholders as well.
Companies enjoy separate legal personality which is a term that speaks to your business being separate from you, in other words it has all the rights capable of being exercised by a natural person and likewise all the liabilities. One of the greatest benefits that arise from this separate legal personality is the protection in terms of accruing liability.
Hence, where a company is limited by shares, the extent of liability is to the number of shares which provides a veil protecting your personal assets. However, to every rule there are exceptions and thus there are instances where a court may “pierce the corporate veil” and reach for personal assets such as in instances of fraud etc.
III(b). Private Company Limited by Shares
Section 25(1) of the Companies Act defines a Private Company by listing the restrictions in its articles deemed necessary for it to be private which includes restricting the right to transfer shares, limiting the number of shareholders to a maximum of twenty, prohibition of inviting the public to subscribe for any shares or debentures, etc.
Pros: Perpetual succession, separate legal personality, still a significant degree of privacy, greater opportunity for funding.
Cons: Greater regulation that in sole proprietorship and partnership, more expenses through incorporation and general operations
III(c). Public Company Limited by Shares
There is the wider source of funding available for public companies limited by shares as they can invite the public at large. However, as a result of this same perk, there is extensive regulation to ensure the public at large is protected which naturally incurs more expense and due diligence. The government is more invasive as it seeks to regulate the sector and thus privacy can be regarded as a foreign concept here. Private companies still have a great deal of privacy based on their very structure and lesser regulation.
Public companies always remind me of that saying, “With great power, comes great responsibility.”
Pros: Able to garner greater capital contribution as they can invite the public at large, perpetual succession, separate legal personality
Cons: Extensive regulation, higher costs for formation and maintenance (more than private companies), limited privacy
Aside: Public Company Limited by Guarantee without share capital
This business vehicle is ideal for the charitable amongst us. No part of the profit garnered under such a structure is returned to the members but put towards furthering the charitable purpose for which the company was established. Additionally, certain tax benefits are given once granted charitable status.
If you need to know about registering your business you can contact a professional and or call the Companies Office or pay them a visit.