Choosing the Right Legal Structure for your Business: Know the options
Often referred to as business structure, throughout the world, entrepreneurs and investors are required to meet certain legal requirements to form the basis of their businesses and the limits within which they can operate. While the legal details of formation, operation and dissolution of business are jurisdiction-specific, most have certain elements in common.
Choosing a legal structure for your business is one of the most important decisions any new business owner will have to make and the decision would mean a significant impact on key areas including ease of doing business, financing options, compliance responsibilities, legal liabilities, scalability, tax rates, ease in transfer of share and control over the business.
The various options for business structure and the pros and cons of each option usually present a challenging task for many entrepreneurs and investors. It becomes more challenging even for the most experienced business owners when they consider the present and future needs of their business. For this reason, it is a decision that should be made in consultation with experienced business Advisors and Corporate lawyers to obtain expert advice on which legal structure will be most suitable for the specific and unique requirements of your business. There are trusted corporate services providers in Ghana who assist their clients in dealing with the dilemma. My first advice is that do not complete a business registration form until you have been properly advised- your hard-earned investment must be protected.
Take the pain in understanding the below, it’s worth your investment in business- it can impact your business viability, growth and sustainability.
In Ghana, the following laws provide for the legislative framework of business structures.
- Companies Act, 2019 (Act 992)
- Incorporated Private Partnership Act, 1962 (Act 152)
- Registration of Business Names Act, 1962 (Act 151)
The main legal structures for businesses in Ghana are:
- Sole Proprietorship/ Enterprise
- Partnership
- Incorporated Companies
- External Companies
The discussion below would set your minds to understanding the general provisions of each of the business structures:
Sole Proprietorship-
This type of entity comes under the Registration of Business Names Act, 1962 (Act 151). In the eyes of Ghanaian laws, this business does not require registration at the Registrar of Companies (Office of the Registrar of Companies) unless the business owner would like to carry on business under a business name. Sole Proprietorship is the simplest form of business. It has no separate existence from its owner. It simply refers to a person owning a business and being personally liable for its debts.
Some advantages of a sole proprietorship include low cost and ease of formation, no corporate taxes, freedom to mix business and personal assets and low level of formalities and regulatory compliance.
Some of the disadvantages of a sole proprietorship include unlimited liabilities of the business, the inability to raise equity capital and the absence of formal structures for business continuity.
Incorporated Partnership
– The Private Incorporated Partnership Act, 1962 (Act 152) provides for the association of two or more persons (not more than 20) carrying on business jointly to make profit. In this type of business, there is more than one owner and the profits, losses and liabilities are shared by the partners. Though the partnership firm assumes the status of a body corporate after the issuance of the Registration certificate by the Office of the Registrar of Companies, each partner shall be liable without limitation from the debts and obligations of the firm.
Among the major advantages of a Partnership business are ease of formation relative to other businesses like limited liability companies, raising funds is easier relative to sole proprietorship, the partnership firm benefits from partners with complementary skills and profits from business flows directly through the partners personal tax returns.
Some of the disadvantages of Partnership business are the absence of business continuity since the firm may discontinue upon the death or withdrawal of a partner, disagreement between partners and the joint and individual liabilities of partners resulting from the act of a partner.
Limited Liability Companies-
Throughout the world, most people use this type of legal structure as the vehicle to carry on their businesses. In Ghana, the Companies Act, 2019 ( Act 992) is the law that regulates the formation and operation of incorporated companies. There are three types of incorporated companies under the laws of Ghana. These are companies limited by shares, companies limited by guarantee and unlimited companies. A company having the liability of its members(shareholders) Limited to their capital invested in its shares is referred to as a company limited by shares. A company limited by guarantee is one having the liabilities of its members (subscribers) limited by the amounts that the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. Companies limited by shares and guarantees are referred to as private companies. Unlimited liability companies, as the name implies do not have a limit on the liabilities of its members.
The simplest and general form of a public or unlimited company is one in which the general public can buy its shares, usually through the stock exchange. This type of company can have more than 50 shareholders or debenture holders.
Unlike a company limited by shares, a key distinguishing feature is that a company limited by guarantee shall not be incorporated with the object of carrying on business for the purpose of making profits. Guarantee companies are best suited for non-profit organisations. We have an article that distinguishes a company limited by shares from a company limited by guarantee. We have an article that distinguishes a company limited by shares from a company limited by guarantee. You may read the article, “Guarantee or Shares: The law, the practice and my commentary” .
A limited company has a separate legal identity from its owners. It is a going concern and has a perpetual succession. Any one person shall form a company in Ghana. A limited liability company incorporated in Ghana shall have a minimum of two directors both of who are natural persons over 21 years of age and one of whom shall at all times be present in Ghana. Any one or more persons may form a company in Ghana. However, the number of shareholders shall not exceed fifty for private limited liability companies.
Among the advantages of a limited liability company are that the liabilities of its members are limited by shares in the case of Companies limited by shares, the continuity of the business is not dependent on any one member or director, the business has more options for raising funds and transfer of ownership is easy.
Some of the disadvantages of this type of business include cost of formation- In Ghana, a minimum capital of 500ghs is required to incorporate a company limited by shares. Additionally, a stamp duty of 1% of your stated capital and an incorporation fee which is much higher than required for sole proprietorship and partnership is required to be paid during the formation. There are also more complex rules and restrictions governing the accounts of this type of business compared to some proprietorships. Compliance requirements for this type of business structure is more complex than other forms of businesses.
External Companies
– also referred to as Branch Office, this type of business refers to a body corporate incorporated outside Ghana but registered with an established place of business in Ghana. A person competent to be a director of a company limited liability company shall be appointed as a local manager to manage the business. An external company is not considered a local company and does not have a separate legal personality distinct from its parent company.
Among the advantages, no minimum capital is required to register an external company. Stamp duty is also not required to be paid for external companies. External Companies can facilitate market entry for the parent company.
One of the disadvantages is that the parent company bears all the risk of the external company. External Companies have restricted activities, unlike incorporated companies. There are compliance risks such as taxation and immigration.
Conclusion
While this article discusses the scope of each of the business structures in Ghana, providing you with the options to choose from, we have a separate article that focuses on specific factors that would be most conclusive in deciding a suitable legal structure for your business. The article which is also useful to the owners of existing businesses who are thinking of converting to a more dynamic legal form, is titled “Choosing Right Legal Structure for your Business: Decision Time”.
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!