CHOOSING YOUR BUSINESS ENTITY
Each of the business structures mentioned below has varying legal requirements, implications as well as liability limitations.
In selecting the most suitable form of business organisation it is important to have an understanding of the characteristics of each business form and to consider its advantages and disadvantages.
1. SOLE TRADERS:
Sole tradership is the simplest most common form of business organisation in
Establishment Procedure: Like other forms of business, the law requires that a sole tradership be registered with the Ministry of Trade and Industry, Cooperatives and Marketing in order to obtain either a manufacturer’s or trade licence.
Normally the issue of licences is governed by the Trading Enterprises Order, 1987 and the Trading Enterprises Regulations, 1989.
Finance: In most, if not in all instances, the financing of the sole tradership will depend on the trader’s personal credit.
Continuity of existence: Generally, the business is tied to the trader as a result it dies with him.
Limitation of liability: as a matter of law the trader is personally liable for the debts of the business. Meaning that creditors can claim against the trader’s estate should he fail to pay his debts.
Control of the business: Since the sole trader owns the business in its entirety, he is the one who gets to make all the decisions.
Formalities: administration is simple and costs are low.
Tax implications: The trader as a matter of law must apply to be registered with the Lesotho Revenue Authority for Individual Income Tax (IIT). Tax implications are both positive and negative. One the one hand, tax losses may be offset against the trader’s other income. On the other profits from the business will be taxed at the sole trader’s marginal income tax rate which may be higher than the business tax rate.
Cessation of business: It is generally simple to cease to carry on a sole tradership and the profits from the business remain with the trader.
Is the above business entity for you? Then do not hesitate to consult us at Corpro Solutions, we see you through the registration process.
2. COMPANIES:
Companies in
Companies are an often used form of business entity. They have significant financial and legal advantages, but are also closely regulated and involve a number of formalities.
Corpro Solutions will act on your behalf to obtain what is called “Certificate of Incorporation” signalling that your company has been incorporated and ready to operate once all other procedures have been successfully completed.
Finance: Finance in a company can ether be raised through borrowing (which the company can do in its own name) or sales of shares in the company.
Continuity of existence: Companies are legal entities in their own right and do not depend on the continuing existence of their members. Therefore, the death, retirement or other withdrawal of a member will not terminate the company and may not even require the reorganisation of the company’s operations.
Limitation of Liability: Liability of members of a company depends on the precise nature of the company. Generally, a member will be liable only to the extent of the capital he or she has contributed (promised to contribute) to the company.
Control of the organisation: Control of the company generally lies with its board of directors. A shareholding does not give the shareholder any proprietory interest in the assets of the business or any say in the direction of the company. However, a large shareholding may give control over the board.
Formalities: There are a number of formalities involved in setting up, running and winding up the company. Apart from those formalities applying to businesses, companies must also comply with requirements as to meetings, filing of returns with the LRA and keeping proper books of accounts.
Admitting new investors: A new investor may be admitted simply by buying shares in the company.
Tax implications: As a matter of law, the company is a separate legal entity from its members, thus pays tax. In most instances, companies are taxed at a flat rate which is significantly lower than the upper ranges of the tax rates applying to individuals. If the company is to make significant profits there can be a large tax saving. The company is also a useful vehicle in tax planning.
Cessation of business: a company can only be terminated (wound-up) in accordance with the provisions of the Companies Act.
3. SOCIETIES/ASSOCIATIONS:
Societies are governed by Societies Act of 1966. The Act governs aspects of the Society’s formation.
Societies are not often used as a business entity. They can either be extremely simple or quite complex, depending on whether or not they are registered. However a registered society has more advantages as compared to one which is not registered.
Establishment procedure: Normally, incorporation of a society is more or less similar to that of a company but simpler and a little cheaper.
Finance: Initially, finance will depend largely on the personal credit of the members; after registration it can borrow in its own name.
Continuity of existence: an unincorporated society will only continue as long as members are interested. An incorporated society has perpetual succession and so an existence independent of its members.
Limitation of liability: The liability of members of an unincorporated society is limited to the amount of their subscription to the society, however in some circumstances the committee members can be held liable. In an incorporated society all members’ liability is limited.
Control of the society: a society is normally controlled by a committee acting in accordance with the rules of the society.
Formalities: Normally formalities surround the issue of reporting the society’s finances.
Admitting new investors or participants: this will depend on the rules of the association, as devised by the members.
Tax implications: The members of an unincorporated society will be taxed as any other individual. An incorporated society may be liable to tax in some circumstances, but this is unlikely to affect its members as any profits made by the society cannot be distributed.
Cessation: The ease or difficulty involved in winding up a society will depend entirely on the nature of the society in question.
4. PARTNERSHIPS:
Partnerships are governed by Partnerships Proclamation of 1978, common law as well as private agreement (the partnership agreement).
A partnership is relatively simple and flexible form of business organisation. The most important consideration of a partnership is the partnership agreement.
Establishment procedure: It is relatively easy to establish a partnership and a little cheaper than to start a company. The partners need to have register and acquire what is known as a deed of partnership.
Finance: Finance may be easier to raise than in the case of a sole trader because it will not be dependent on a single person’s credit.
Continuity of existence: the partnership has no existence in law separate from the partners. However, the partnership’s is not usually tied down to the involvement of any particular person.
Control of the organisation: the partners own and operate the business and make all the decisions. However, decisions must t be made jointly by the partners and some decisions require unanimity.
Formalities: Administration is relatively simple and costs are low. Similar to a sole tradership to a certain extent.
Admitting new investors: there is an absolute limit on the size of the partnership. The Companies Act as well as the 1957 Proclamation specifically mention that a partnership in
Tax implications: Partnerships do not pay tax, partners do. This means that partnership losses can be offset against the partner’s other income. Partnerships are often used for income-splitting purposes.
Cessation of business: It can be simple or complicated to end a partnership. Dissolution of a partnership can be achieved voluntarily or by court order.
5. COOPERATIVES:
Cooperatives are governed by the Cooperatives Societies Act of 2000 as well as being subject to general business law.
A registered cooperative is a body corporate with a legal personality separate from its members.
Establishment procedure: Establishment is not necessarily complex, but the Registrar has discretion whether or not to allow registration.
Finance: The availability of finance will depend solely on the particular circumstances.
Continuity of existence: The cooperative has an existence independent of its members.
Limitation of Liability: Members’ liability is limited by the amount of share capital they subscribe for, and the rules of the cooperative.
Control of the organisation: The organisation is ultimately controlled by members but its business is controlled by a board of directors (like in a company).
Formalities: There are certain formalities involved in the cooperative form of business but these are not unduly burdensome.
Admitting new investors: Shares can be bought with few restrictions.
Tax implications: There are particular tax laws relating to cooperatives, one advantage of which is that a cooperative will pay tax on any trading surplus at company rates.
Pros and Cons: what are the advantages and disadvantages of the main business structures?
Set below are some of the advantages and disadvantages of the main business structures: sole trader, partnership and corporation (Incl. Company, cooperative, etc).
Sole trader
Advantages:
· It is the simplest form of vehicle, with the least legal and administrative procedures and costs of implementation.
· The owner has full control of the business.
· The owner is entitled to the entire profits of the business.
· The owner is entitled to sell or discontinue business if he pleases.
· Discontinuance of the business requires minimum legal costs.
Disadvantages:
· Owner has unlimited personal liability for debts and for negligence (eg employees’ errors) committed while conducting the business.
· Success and continuance of the business are tied to the ability and the health of the owner.
· Managing skills is confined to that of the owner and the employees.
· Expansion and raising additional capital is more difficult than when more sophisticated vehicles are used.
· It is unsuitable when more than one person is providing capital for and in conducting the business and each desires a share in control and management of the business.
Partnership:
Advantages:
· The legal and administrative procedures and costs of formation are relatively inexpensive.
· A partnership provides for the business the combined labour, expertise, management skills and financial resources of the partners.
· There is a greater ability to overcome the consequences of the disability, sickness or accident of a partner than for a single proprietor.
Disadvantages:
· The unlimited liability of each partner for debts and the conduct of the business, including for activities of each partner.
· The potential for disputes and breakdown in the mutual trust of the partners.
· More potential to raise further capital than sole trader, but less than corporate business.
· Potential problems relating to the retirement or admission of partners.
· There is a potential for termination in the event of dispute and may be considerable legal and other costs in the event of a disputed dissolution of the partnership.
· A partnership is not a separate legal entity for most purposes and requires participation of all partners for many legal transactions.
Corporation
Advantages:
· Corporations have perpetual succession (until wound up or dissolved) and their continuance is not affected by the death or withdrawal of shareholders.
· Shareholders generally have limited liability and are not liable for the debts of the corporation.
· The corporate structure affords considerable flexibility in the organisation, management and financing of the corporation because:
(a) Corporations may have a large number of shareholders (50 shareholders for private companies) while partnerships are restricted to only partners;
(b) Shareholders may have varying entitlements to dividend and control;
(c) Corporations may be private or public;
(d) It is possible to seek funds from the general public, subject to compliance with statutory requirements;
(e) It is easier to finance larger business projects through the corporate structure; and
· Ownership and management of corporation can be separated and control can be vested in directors and in some other groups of shareholders.
· Shares can be bought and sold without interfering with the corporate structure.
· There is considerable scope for tax planning.
Disadvantages:
· The corporation structure is more expensive and complex to form and to maintain in existence in terms of legal and accountancy work and administration.
· There are more detailed and rigorous legal and financial reporting requirements than for partnerships or for sole trader although proprietory companies, especially those that are “small”, have fewer requirements to meet than other companies.
· As some of the corporation’s financial information must be filed in publicly available registers, there is less privacy regarding its financial affairs than for partnerships.
· Shareholders, particularly minority interests, may not have effective involvement or control over decision-making or management.
Brainstorming entity names: choosing the perfect name…
Once you have determined the legal entity type to use, brainstorm on some names for your business. Write down 3 names now, starting with your most preferred name.
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· ____________________________
· ____________________________
Make it official: Forming the legal entity.
Now that you have chosen the type of legal entity, and have determined what name to use for your business, it is time to file the proper papers with different offices that deal with business registration
This is the part where Corpro Solutions comes in. because we at Corpro Solutions understand that running a business is hard enough, we maintain that starting one should be easy. That is why we are committed to helping you successfully register any form of business be it a sole tradership, a company, a partnership or a society by offering you advice on start-up of such a business.
So what are you waiting for? Visit us at Corpro Solutions and we will be more than happy to answer any questions you might have on the information above.
