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4 Types of Business Structures and Their Pros & Cons

June 5, 2023
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By
Eric Dickler
business structrures

Starting a business can be both exhilarating and challenging. One of the most important decisions you’ll have to make as a business owner is choosing the best business structure for you. To do that, you’ll have to learn and weigh the different types of business structures out there.

So let’s learn about the four most basic ones and their respective pros and cons.

Company

A company is a type of business structure that is owned by shareholders and managed by directors. One of the most significant advantages of a company is that shareholders have limited liability for the company's debts and obligations. In other words, if the company acquires debts or is sued for any reason relating to the business, the personal assets of the stakeholders are protected.

Companies are more secure, however, more complex to set up and run than other business structures. They also have more regulatory requirements and paperwork to comply with, which can result in higher legal and accounting fees, not to mention the potential for disagreements between shareholders, which can be hard to resolve.

Still unsure what business structure is the right one for you? We recommend talking to our expert accountants today!

Partnership

From the word “Partnership” itself, this is a structure where two or more people share ownership of a business. There are two types of partnerships: General partnerships and limited partnerships. The former refers to all partners having an equal liability for the debts and obligations of the business, while the latter is pertaining to at least one general partner with unlimited liability and another or more limited partners with limited liability. 

Partnerships have fewer regulatory requirements and paperwork to comply with and are relatively easy to set up and run. As the saying goes, two heads are better than one. Shared decision-making and responsibilities can be highly beneficial in several situations, as can the ability to raise funds by adding more partners.

But just like all other business structures, Partnerships have their setbacks, one of which is that if the business incurs debts or is sued, partners’ personal assets can also be at risk.

Sole Trader

If you want complete control over the business, registering as a sole trader is a fitting business structure to consider. Sole traders own and operate the business and have lower regulatory requirements. 

But as with everything else: with great power comes great responsibility - for the debts and obligations of the business. As a sole trader, you and your business are considered “one”, which means you will have unlimited personal liabilities, putting your personal assets on the line when the business incurs debts or other issues.

Trust

A trust is a type of business structure that allows for one person (a trustee) to hold and manage assets for the benefit of others, known as beneficiaries. 

One of its significant advantages is its flexibility in distributing income and assets to the beneficiaries. Trusts can also hold assets in perpetuity and may offer possible tax benefits. 

It is however considered one of the most complex business structures because of its legal nature of existence. There are high legal and accounting fees associated with establishing and managing the trust. 

If you are considering being a trustee, it’s essential to know that you will be subjected to a fiduciary duty, which means you will need to act in a way that will financially benefit the interests of the beneficiaries. It involves prudently managing the assets and understanding the scope of your responsibilities and the legal obligations that may come with it. While there are risks and liabilities as an acting trustee, it can also provide you with valuable professional development and networking opportunities that may be useful for personal endeavours.

If you are a potential beneficiary, on the other hand, you will be happy to know that a trust will provide a level of asset protection. Since the trust holds the assets, they are separate from your personal ownership. This safeguards the assets from creditors, lawsuits, and other risks. Depending on the type of trust and local tax laws, beneficiaries may also enjoy tax benefits like tax-efficient income distributions or estate tax savings.

Want to learn more about Business Structures? check out our FREE Business Structure course today!

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