QUESTION: My name is Anne, I recently attended a start-up seminar hosted by a university. One speaker advised us to register the right type of business association but did not elaborate much. What are the different types?
When it comes to business associations, there are three categories available. Each has different features and is governed by a separate law.
The first type is a sole proprietorship. As the name suggests it is owned by one person. Its registration is simple, cheap and fast. It is done under the Business Name Act through the e-citizen platform. Once the application is finalised you will be issued with a certificate in the name of the business.
While it is the cheapest and simplest form of business association, it has several disadvantages. The first is that a sole proprietorship and the owner are considered as one person. This lack of distinction means you could end up being personally liable for your business liabilities.
This is unlike a company where the owner is protected from personal liability. Secondly, sole proprietorships are harder for equity investors. Equity investors are those who want a stake in your business. It is best for simple businesses.
The second type of association is a partnership which is a business owned by two or more people with the aim of sharing revenue. Registration of a partnership is a fairly simple through the e-citizen portal. A certificate is issued in the name of the partnership.
Their relationship is governed by a partnership deed, which states the manner in which the co-owners will run and manage the business, their rights and responsibilities, capital contributions, revenue sharing, financial issues, dispute resolution among other clauses.
The main advantage of a partnership is the aspect of shared risk, division of duties and raising more capital. It shares a similar disadvantage with a sole proprietorship in that the owners are personally liable for business liabilities. It is best for simple co-owned businesses.
The last type is a company. The law allows companies to be single or multiple-owned. This means that you can form a company even as one person. Private companies are limited to 50 members while anything above this becomes a public company.
They are more complex to register and manage as a number of filings like annual returns have to be done yearly. Registration is done through e-citizen. It is also more expensive to register a company and a lot harder to wind up.
There are however many advantages of having a company the biggest being that the owners and the business are separate. This means that the owners are not personally liable for debt or lawsuits. A company is however not suitable for short-term ventures.