
Choosing the Right Legal Structure for your Business: Decision Time
Choosing the Right Legal Structure for your Business: Decision Time
An ounce of prevention is worth a pound of cure. Whether you are ready to start a business or grow an existing business, holding off on hiring the right compliance consultant until you need one could cost you a fortune. Your business deserves to thrive. Your investment must be well protected. Your capital must grow. Your business goals must be realised. With the right help in deciding the most appropriate legal structure, you have a good foundation to lay the business bricks.
You may have already heard of the types of business structures, but not given them much thought. Each one has its own set of advantages and disadvantages; we have more about that in a separate article titled, ” ” Choosing the Right Legal Structure for your Business- Know the Options”.
In this article, we have attempted to help you decide which legal structure best fits your business. It is important to understand the key questions to ask and provide honest answers that will form the basis of taking the decision for the most suitable business structure that will be peculiar to your needs. A good consultant never decides a business structure for a client. You are in good hands if your compliance consultant understands your business model, and helps you make the decision.
Follow through these five important factors you need to consider:
- Capital, cost and ease of formation: The various business structures present different degrees of cost at the start-up phase. In general, the more complex the business structure, the more expensive it is to set up. Sole Proprietorship is the simplest form of business structure and requires minimal administrative procedure in setting up. Sole proprietors are not required to pay stamp duties or meet minimum capital requirements. A more complex business structure such as limited liability companies require minimum capital, periodic and strict reporting requirements, relatively higher statutory fees to incorporate and the need to engage an auditor as a legal requirement. Consider a simpler structure like a sole proprietorship or partnership when starting a business with relatively minimal start-up funds.
- Ownership: It is not surprising to listen to investors and entrepreneurs ask endless questions to understand what they own, how much they own and what actually the concept of ownership of part or all of a business means. Does ownership mean control? When should ownership of a business be encouraged? Can ownership get you into serious trouble? It is indeed important to understand what it means to wholly own a business or have co-owner(s). We would not attempt the nuances in ownership theory but rather limit the concept to its application to the subject of discussion. Generally, ownership in a business can simply be looked at from the risk and reward perspective if the concept is discussed in its economic terms, which is usually the case in business. Legally, ownership is the right to the possession of something and it confers title in a claim. In business, ownership confers rewards and imposes risk liability resulting from the enterprise. The business structure you decide on can affect the aspect of the business you own. Sole Proprietorship allows for an individual owner who has exclusive and ultimate rights and responsibilities in the business. Partnership requires at least two people and a maximum of 20 people who will own the partnership business as partners. A private limited liability company requires at least one owner, referred to as a member, a shareholder, or a stockholder. The maximum number of shareholders or debenture holders is 50 for a private limited liability company. Public Companies can have an unlimited number of shareholders. The Companies Act, 2019 (Act 992) allows for individual and corporate/institutional shareholders. As owners of the business, shareholders contribute capital to the company, they reap the benefits from the business through dividends or increased share capital and they bear the risk of losses also. A company limited by guarantee is owned by subscribers (individuals or institutions) who do not take profits but agree to pay a set sum of money when the company becomes insolvent. One can become an owner of a business by either establishing it (subscribing to the shares) or buying (acquiring shares). Ownership has a direct relation with control.
- Control and Management: Your choice of business structure will inform how much control you exercise. If you seek to have control over your business due to reasons such as protection and promotion of values, pleasure, business module, etc, then all things being equal, you have to consider a sole proprietorship. However, you may consider a Limited Liability company if control isn’t a key factor in your business. A limited liability company requires that you have a board of directors, appointed by shareholders who are charged with running the company. A business owner could dilute his control if he runs a company limited by shares and attracts funding from other investors who acquire equity in the company. It is however important to know that even for a company limited by shares, the control decision remains largely with the owner who decides to or not to invite other shareholders. To maintain control in a company limited by shares, the owner could raise debt capital instead of equity capital. In a company limited by guarantee, the business is run by the executive council members who are appointed and controlled by the subscriber(s). The owner of a guarantee company exercises exclusive control until he invites other guarantors as subscribers.
- Risk and limitation of liability: There are indeed risks and liabilities associated with starting and running a business. Though entrepreneurs are often risk takers, the degree of risk differs among various entrepreneurs. The risk of insolvency is usually the most serious risk entrepreneurs worry about. A sole proprietor has an unlimited liability, that is, in case of eventuality, he is solely responsible for the financial debt and obligations that arise. The concept of unlimited liability also applies to incorporated private partnerships. Every partner is liable to the firm and the other partners, without any limitation, for the debts and obligations of the firm incurred while he is a partner. Unlimited liability companies are also registered with shares but there are no limits on the liabilities of the members. There aren’t many unlimited liability companies in Ghana. In the case of a company limited by shares, the shareholder’s liabilities are limited to any amounts unpaid on the shares, and once a shareholder has fully paid for his shares, he is not liable to any further debts or obligations that arise in respect of the company. Unless in situations where a shareholder has pledged or resolved to pay the company’s liabilities with his personal funds or assets when the company is winding up, shareholders who have fully paid for their shares are not required to contribute additional funds.
- Tax Implications: Your choice of business structure will determine what type of taxes to pay and how much you pay. In Ghana, corporate income tax is paid from the profit of limited liability companies in a year. Withholding taxes, directors’ taxes and personal income taxes are generally the other types of taxes paid by limited liability companies in Ghana. Companies limited by guarantee do not pay corporate taxes since they are not set up to generate profits that will attract taxes. However, personal income taxes and all other forms of taxes could apply to this type of business structure. Partners pay personal taxes which flow from the business profit. The partnership firm is not liable to taxes. Sole proprietors have the simplest form of tax structure which does not require complex compliance structures like that of limited liability companies. For further details on taxes, read our article on “Taxes in Ghana: Facts, Figures & Insights”.
Conclusion
It is important to ask the right questions to inform current decisions and long-term impact on your business. Investors and business owners should endeavour to engage regularly to understand the changing dynamics in the compliance landscape in Ghana. This article only provides a guide using general issues in the business environment and legal framework in Ghana. It is recommended that this article inform you to properly engage a compliance consultant who may help understand your peculiar needs in relation to business formation, acquisition or conversions.
As we usually conclude, how much does your investment mean to you? Seek professional advice to ask the right business questions, provide honest answers and remember the decision is yours to make. After all, it’s your business!