If you're setting up a new business then you need to decide what kind of entity it will be structured under.
A business name (or 'sole trader') is generally for those companies that are starting out. This structure has certain liability attached to it that makes the business owner personally liable and is essentially the same as trading as an individual but with a business name or title.
A company structure on the other hand provides a formal entity and a shareholding which numerous parties can be shareholders of and provides a structure that offers directors (individuals that run the company) to run the business with a limited liability while also offering the ability to have numerous shareholders who control the equity in the business. Shareholders can appoint directors to run the business and a shareholders agreement outlines how the business equity will work and who controls the business based on their share type and quantity.
Companies provide a platform for doing numerous arrangements in future and offer flexibility to stakeholders.
Companies provide protection for individuals providing they meet the basic running requirements of a company. Their personal assets remain somewhat protected. Unless a director offers personal guarantees then it is not expected that his or her own assets will be security for any company failure.
While this is not accounting or legal advice, this advice is provided from a business management perspective and is in relation to the structuring of a business for best running practice.
By structuring the business as a company (In Australia this is known as Pty Ltd or Proprietary Limited company) it offers business directors the ability to be excluded or included in the shareholding of the company. This provides numerous benefits for taxation reasons and also provides the ability to have multiple companies interacting with each other for a global purpose. In other words, those who run the company may not be those that own it.
The taxation benefits of a company structure also may be beneficial when compared to personal tax treatments. Essentially business owners use companies as an entity structure to provide separation between themselves and the business. They can also use company structures to provide protection for valuable intellectual property and revenue centres.
Protection against fraud and operating risk is also a reason why company structures are utilised. For example; a company holding a valuable amount of intellectual property may structure itself to have a trading entity and an intellectual property entity. The reason for doing this is that if the trading entity is sued due to an issue in business then the intellectual property that another company holds remains separated from this risk. Companies often work together using a number of business instruments generally in the form of licensing and contract agreements between themselves.
It is not uncommon that multiple entities will share a similar share structure and that structures are put in place for business strategy reasons including risk mitigation, preparation for a public entry to bring liquidity to shareholders, asset protection, lending suitability, corporate governance and individualising profit centres.
Governments generally support the establishment of companies to offer entrepreneurs a buffer with respect to the risks associated with growing businesses as generally they see it beneficial to stimulate the economy while also providing entrepreneurs with a realistic risk profile in terms of their own personal risk attached to any one venture.
Shareholders in a company enter a shareholders' agreement with the knowledge that there is a certain amount of risk associated with dealing with a Proprietary Limited Company and therefore the governance of a Pty Ltd company is somewhat relaxed when compared with a public company.
Shares in Pty Ltd companies are often relatively speculative and entrepreneurs sell shares in companies as a means of generating the required investment to take their company to the next level or for liquidity reasons to realise some of their hard work. Pty Ltd shareholders are usually either initial contributors to the business either via intellectual property, labour contribution or they may invest through financial contributions (Start up capital).
Every country works slightly differently with respect to registering a company and/or business. Here is a link to some great info in Australia:
The most exciting thing about business is that ANYONE can do it. Literally ANYONE. From trading basketball cards with your friends on the football field as a kid, to washing your neighbor's car; doing business is in our blood but many of us get caught up in the rat race, thinking it’s too hard or expensive to start a business so we settle with a relatively boring life.
The number-one reason that employed people don’t start a business is the perceived risk of leaving a regular salary.
The following information is designed to inspire budding entrepreneurs by breaking down the steps of starting a business. No matter what your starting capital, if you are passionate about doing it then it can be done. You don’t have to be rich but for every cent you save you better be willing to invest your time. The good news is; it will pay dividends.
Here are the steps to getting started in business:
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