What Business Vehicle Is Right For You?
Understanding and choosing the Right Business Vehicle for your Startup
• 24 Nov 21
Selecting a fitting business vehicle for your Startup can be a confusing and intimidating process. However, by conducting the necessary research and arming yourself with reliable legal information, you will be equipped to make the best decision. The following article will take a look at examples of different business vehicles and the steps associated with choosing an appropriate one for your company.
Understanding Business Vehicles
Failing to adopt a suitable structure for a new business may result in unnecessary challenges and financial losses. Much like the conventional use of a motor vehicle allows for transportation from one point to another, a business vehicle is a legal structure that will carry your business through all its activities and processes.
It is important to remember that the type of business vehicle selected for your business will inform many key processes such as taxes, financial loans, investments and various legalities.
Types of Business Vehicles
As a new business owner, learning and understanding the different characteristics of each existing business structure will help to determine which one is most suited to your company’s needs. Below, we take a look at some of the most common business vehicles, along with the pros and cons of each one.
Perhaps the simplest and most common type of business structure, a sole proprietorship is run by a single owner who takes responsibility for any and all business conduct. The business does not have to be registered and may operate under a trading name or the name of the sole owner. In some cases, the sole proprietor may need to obtain special licences or permits depending on the industry. While establishing a sole proprietorship is pretty straightforward, there are various factors to consider before settling on this structure.
- Clear-cut outline and structure, making it simple to start
- All business regulations are decided by the owner (meeting structures, administrative functions, financial activities, etc.)
- Simple tax process
- Individual financial responsibility – all debts and liabilities fall to the sole proprietor. This could result in the seizing of the owner’s personal assets in the case of an entity winning a lawsuit against the business
- Sole proprietorships often struggle to secure funding and interest from investors since there is no discernible separation between the business and the business owner
- Overlap of personal and business finances often leads to financial risks
General business partnership
When two or more individuals collaborate and go into business together, it is called a general business partnership. Many professional firms and business entities have adopted this structure, owing to its well-established reputation as a reliable business vehicle. Within a general business partnership, all business owners are responsible for business activities and processes, and they share all profits and losses. Much like a sole proprietorship, general business partners do not have to be registered, however, contracts and agreements between partners must be established.
Although this business vehicle is a great option for newly established businesses, it is highly advisable to be thorough in selecting a suitable business partner. Disputes of any kind can be a high-risk factor for the company. All partners will be held responsible for the actions of a single partner, should any contracts or agreements be violated.
- Clear-cut outline, making it simple to start
- Business owners make all decisions on how the company is run
- Profits and losses are divided equally among partners
- Business losses can be deducted from personal tax returns
- All owners are responsible for business-related debts and liabilities
- Joint liability means that each partner can be held personally responsible for the negligent or intentionally damaging behaviour of their business partners
- May be harder to secure funding and investment opportunities
- Disagreements or internal disputes could lead to the downfall of a company
Limited liability partnership
The keyword in a limited liability partnership is flexibility. In order to form this kind of business structure, the partnership must be registered with the state. In a limited liability partnership, we see two types of partners, namely the business owners who operate all functions of the business (much like the general partners outlined above) and the investing partners (commonly known as silent partners).
Based on this structure, limited partners/investors do not inherit the same level of liability as the general partners since they are acting only as financiers and have no say in the general operations of the business. In essence, the limited partners are considered to be a separate entity and are only liable for the money they have chosen to invest, along with any agreed upon personal guarantees.
All members of the limited liability partnership must provide a registered address for the business, and maintain an updated register of existing members.
- Acts as the best business vehicle for raising funds since investors are able to provide finance with little to no personal liability
- Limited partners are free to withdraw at any time and the business can remain operational
- General partners maintain full control over business operations while being able to secure the necessary funding
- Requires state registration
- General partners accept all personal liability for any debts associated with the business
- Limited partners face the risk of personal accountability for any losses or legal matters should they take on an active role within the business
An C corporation is a US business structure which can be explained as a limited liability entity that exists separately from company owners. In addition to the owners (also known as shareholders), a board of officers and directors take control of this business entity, although it is possible for one person to be at the helm of a C corporation.
This business vehicle will include a considerably different set of rules and regulations, tax processes and company laws. Shareholders and owners, for example, are taxed separately from the business entity.
- Shareholders do not have personal accountability for any business-related debts and liabilities
- No restrictions exist regarding who can hold company shares
- Recognition and enhanced interest from potential investors
- Easily transferable shares
- Significant legal protection
- Double taxation – shareholders pay personal income taxes on their profits while the business pays corporate tax on company income
- More stringent rules and regulations regarding company laws and operations
- Costs more to form than other business vehicles
- Business losses may not be deducted from personal income taxes
Another US based concept, the structure of an S corporation protects the personal assets of an owner from any corporate liability via pass-through taxation. This means that the company’s profits are taxed with the owner’s personal tax return and the corporation is not taxed as a business entity. S corporations are limited to having 100 shareholders or less.
- No personal liability and risk of losing personal assets for shareholders
- No double taxation
- Pays employee dividends
- Recognition and enhanced interest from potential investors
- May incur more fees and administration than other business vehicles
- Stringent rules and guidelines for company operations
- Owners have less control over company processes
How to choose the best business vehicle type
As we’ve outlined in this article, carefully selecting which business vehicle is best for your company can help propel the entity toward a successful future. More importantly, choosing one that does not suit your business and its needs could lead to major financial and legal challenges.
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.