Here are 7 reasons why choosing a company structure for your business may make good sense.
1. Personal asset protection
Companies are the most popular structure for business growth because of their limited liability (Ltd) structure. If you are a sole trader, you are the business, so your personal assets are not separate and business failure (perhaps through no fault of your own) can place them at risk. In a partnership, you may be held ‘jointly and severally’ liable for the debts incurred by your partners, again potentially placing your personal assets at risk.
A company’s liability is limited to its capital (including any unpaid portion). The personal assets of the shareholders and directors (often the same people in smaller companies) are generally protected unless the directors have ‘traded recklessly’. Although limited liability can be eroded by personal guarantees that the company director(s) may have to sign, not all creditors will demand personal guarantees and company owners may also be able to withdraw or reduce the need for personal guarantees as the company strengthens.
2. A separate and enduring entity
When you register a company, it is legally regarded as a separate entity. This means that unlike a sole trader, the company structure can endure beyond your lifetime. Some companies have lasted for generations.
3. Credibility in the marketplace
Linked to this second point, registering your business as a company can enhance your image in the marketplace. First, it shows that you are thinking about the long-term success and durability of your business. Second, companies are simply perceived as being on a different and more advanced level than one-person operators (sole traders). Customers may even perceive less risk in doing business with a more formally structured business.
4. Credibility with lenders and investors
Registering as a company shows lenders that you are serious about your business and can make it easier for you to raise finance. It is also the only trading structure that will be attractive to investors, since they can take up shares in return for their capital investment.
5. Ease of sale or transfer
If you wish to sell your business to staff, your children or an outsider, the company structure can make your business more attractive to buyers and therefore more marketable. Buyers can purchase all or some of the shares, or you can gradually transfer shareholding to members of your family over a number of years.
6. Tax options
Taxation is a complex subject best explored with your accountant or a specialist tax advisor, but in broad terms a company can offer more tax options than a sole trader or partnership structure where you pay personal tax rates on the net profit from the business or your share of the partnership. You can also discuss with your accountant or tax advisor the possible tax advantages of registering as a Loss Attributing Qualifying Company (LAQC).
7. Ease of establishment
Contrary to popular belief, companies are easy and inexpensive to establish. New Zealand has one of the fastest company formation processes in the world, and most of it can be completed online. This makes the company option attractive to anyone in business.