Chapter 5: Recommendations and Conclusion
2.18 ORGANISATIONAL STRUCTURE
One basic question facing all new business owners is "What business structure is best for me?" The business form or structure allows and requires different things.
There are four main types of business structure namely sole proprietorship, partnership, closed corporation, or a company. People new to business may think that it doesn't matter how a business is organised or structured but it can make a big difference. The correct structure can help a business to reduce costs whilst maximising profits. On the other hand some investors or partners may only be interested in certain business structures and by the same token banks and other
sources of money may be more willing to lend to certain business structures as opposed to others. Taxation and tax planning are different in different business structures and the type of business structure that one chooses can affect how that business grows.
2.18.1Sole Proprietor
This structure is the simplest of the four business structures. A sole proprietorship is a business that is owned and operated by one person. Most self-employed people operate as a proprietorship. As sole owner of the business, the proprietor is personally liable for business contracts and is responsible for any wrongs committed by their employees.
Advantages . Disadvantages
Easy and inexpensive to set up Directly controlled by owner!operator
the
.:. Unlimited personal liability (which means all personal and business assets of an owner can be taken to fulfill business obligations)
.:. Business losses can be deducted from other income
.:. Wages paid to a spouse are deductible from the income of the business
.:. Silent investors are acceptable, by written agreement, instead of issuing a share or stock certificate (which is how an incorporated business raises money) Table 2.1: Sole Proprietor
.:. No opportunity for continuity: the sole proprietorship dies when the sole proprietor goes out of business or dies .:. Narrow management base
.:. Difficulty in raising capital .:. Difficult to sell business
2.18.2 Partnership
A partnership is also easy to set up. A partnership is created even if the partners don't sign any agreements or contracts. Formal or informal, a partnership is a legally binding business relationship in which each partner takes responsibility and becomes liable for the actions of the other partners. This includes actions that may be taken without a partner's knowledge. This risk is part of the business structure.
A partnership must legally register its name and give information about the partners, so the public has a way of finding out who it is dealing with. Selecting, checking, and filing the business name of a partnership requires the same steps as for a sole proprietorship.
Business planning for a partnership involves discussing all aspects of the business and how it will function. This is particularly important if prospective partners are friends or relatives. Some important areas of discussion should include the goals of the partnership - both short-term and long-term goals - and how these goals will be reached. The question of how profits will be used is also important. The two main options with regards to profits are whether they are taken out of the business to be divided among partners or turned back into the business. Partners may want the portion or percentage that they receive to change when the profits reach a certain point, or when the business reaches a certain size.
Written agreements among partners generally include the following kinds of information:
.: .
Name ofthe partnership business. :.
Names and addresses of the partners...
. :.
Business to be done by the partnership.:.
Capital to be contributed by each partner.:.
Procedure for adding new partners.:.
Procedure for a partner to leave.:. Procedure for the death, bankruptcy, or retirement of a partner .:. Procedure for making decisions
.:. Procedure for handling disputes .:. Responsibilities of partnership
.:. How profits and losses are to be shared .:. Terms for ending the partnership
.:. Name of who will keep the partnership's financial records
.:. Methods that will be used to keep financial and other business records
.:. Any limitations upon the authority of a partner to act as an agent for the partnership.
Advantages .:. Easy to set up
.:. New partners can be added easily (so this structure is more flexible and has a greater chance of continuity than a sole proprietorship)
.:. Few formal legal requirements
.:. Risk is generally shared equally among partners
.:. Partners can provide mutual support and different skills
.:. More sources of capital .:. Broader management base .:. Easy to change legal structure
Table 2.2: Partnerships
Disadvantages
.:. Tax and estate planning options are limited
.:. Partners and all their assets (personal and business) are at risk for any losses suffered
.:. Sometimes business and personal liabilities of a partner aren't kept separate (with potentially disastrous consequences to other partners whose shared business liability could result in unexpected personal losses)
.:. Decision making may be difficult (because each partner has equal rights to be part of that process)
2.18.3 Close Corporations
Close corporations are established when a founding statement is registered with the Registrar of close corporations. A founding statement should contain the following:
.:. A registration number
.:. The full name of the corporation
.:. Description of the principal business that the corporation will be conducting .:. Date of the end of the corporations financial year end
.:. The full name, identity numbers and residential and postal address of each member
.:. The percentage size of each members interest
.:. The corporation must use its registered full name and the letters CC on all its business dealings.
Advantages
.:. Limits the liability of owners: personal property cannot be taken for business debts. However, for new business starts, financing will probably require personal guarantees anyway so the limited liability protection may not matter
.:. Readily recognized and understood by lending agencies
.:. The enterprise has a continuous existence
Table 2.3. Close Corporations
Disadvantages
.:. Requires a lot of paperwork and regular reporting to the government
.:. Expensive to set up compared to other business forms, sometimes involving lawyer's costs and incorporation fees .:. Less privacy regarding financial
and other affairs