Business forms: Using the right ones for your business

BY MARIA SOOKDEO

Wednesday, April 24, 2019

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BUSINESS activities are an essential part of every society. Their success, especially when first starting up, depends on many social and economic variables, but one of the most important things is what legal form the business adopts. Long-term success and prospects, through relationships with suppliers, investors and customers, can be hugely affected by the structure chosen.

In June 2018, ACCA launched the first of two research papers highlighting the most important steps in choosing the right legal forms when setting up a new business venture. ACCA has created a set of guides for start-ups in a variety of countries to help with that choice. The guides provide brief introductions to the main attributes and the most common legal forms suitable for start-ups in several countries/regions. Their aim is to help entrepreneurs and their advisers make an informed decision on which to choose.

Each guide is the result of regional surveys with the characteristics of the business forms split up into easy to read formats.

REALISING THE RETURNS

Do you want your business to create a profit for the investors, or are you driven by other motivators like community benefits? Is the long-term goal financial security for the founder or do you want to make a profitable sale?

Most businesses are run with a view to creating a profit for the investors (whether owners, managers or lenders), but there can be other motivations, such as providing community services or wider public benefits, which might restrict the range of business vehicles available.

Deciding what 'value' is for the business, and then how best to ensure that the value ends up where it is supposed to be, is perhaps the most important consideration when deciding on forms.

Whenever money is realised, there are likely to be tax consequences, and while it is rarely if ever a good idea to allow business forms to be driven by tax, at the same time it is important to factor in the impacts of the tax system on your business when deciding how to structure it.

INVESTING INTO THE BUSINESS

You must consider whether or not you need to raise money to develop the business.

If the founders need more start-up funding than they personally have available, then the simplest way to introduce money to the business is often to borrow it – which will involve paying interest.

Before you ever make a profit to realise though, you'll need to invest the seed capital. Where or who is that going to come from, and what terms will you accept it on?

There may be other sources of funding, such as government grants, which are often targeted at smaller firms, and again, as with realising returns, it is important to understand the tax impacts of different funding models.

LEGAL CHARACTERISTICS

Will the business need a separate legal identity from its owner(s)? That is, will it need its own identity, and the capacity to own things in its own right? Or can everything be held in the legal name of the owner?

The business's legal rights and responsibilities will be of crucial importance to how stakeholders (suppliers, customers and even employees) deal with it. Companies and other 'bodies corporate' exist as independent legal entities, able to enter into contracts and enforce (or be subject to) rights and liabilities. That contrasts with the sole trader's position, where everything is done directly in the name of the individual responsible.

ADMINISTRATIVE REQUIREMENTS

Will there be occasional requirements such as formalities around the start-up or sale of the business? Or will there be regular requirements around, for example, accounting information?

Starting the business is something that happens only once. The legal form you choose should be based on long-term factors, not just the ease of the start-up process. It is important, nonetheless, to understand what needs to be done, how long it will take and what it might cost.

Some broader considerations include:

TRANSPARENCY

There is often a trade-off between the level of rights or freedoms a business vehicle has and the amount of information about itself that it has to make public. The link is sensible – for example, where companies can raise money from the general public through 'listed' securities they have to publish considerable amounts of legal and financial information so that investors can make an informed decision.

Likewise, entities that enjoy limited liability are usually required to report or publish financial information so that potential creditors can understand what limits there might be on recovery if they do enter into a financial relationship with the business.

ACCOUNTABILITY

The rights that a business has, for example, to protect its name or enter into contracts, are usually reflected in the responsibilities it has for filing accounts or maintaining reserves for its creditors.

The mechanisms that society has to hold the business to account for its actions, whether in respect of investors, creditors, employees or customers, may vary depending on the business form.

The extent to which investors are liable for the debts of the business is often linked to the level of formality involved in setting up and running the undertaking, and the transparency of its operations.

Maria Sookdeo is a business development manager for the ACCA.


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