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.