Dreaming of setting up your own business? This is perhaps one of the most exciting life projects one can undertake in one’s career, and the the final step a professional takes to establish themselves as a leader in their sector, but, regardless of how extensive their knowledge of their field may be, it is important to have a firm grasp of other administrative and legal concepts before to start a business, such as, for example, the legal form of the company that best suits your needs.
In this post, we’ll be discussing the different legal structures on which a business can be based, so do read on if you’d like to find out about all the options.
What is the legal form of a company?
A company’s legal form refers to the legal and organisational structure under which it operates. It is a crucial decision that entrepreneurs must make when setting up a new business, as it affects various aspects, such as legal liability, taxation and management structure.
Choosing the right legal form is of vital importance, as it has a direct impact on the company’s long-term viability and success. For example, the choice between being a public limited company, a private limited company or a sole trader will determine the owners’ financial liability, the tax burden the company must bear and the flexibility in decision-making. Choosing the right legal form contributes to the protection of property owners’ interests, optimises the operational structure and facilitates compliance with legal and tax obligations. Understanding the implications of each legal form and choosing the one best suited to the specific circumstances and objectives of the business is therefore essential for establishing a solid and sustainable foundation in the business world.
Main legal forms of a business: Which would you choose based on its characteristics?
Self-employed people: also known as a self-employed person or freelancer, is a simple form of business organisation in which an individual is responsible for all decisions and bears full responsibility for the the company’s legal and financial liability. This type of structure is suitable for small, sole-proprietorship businesses.
Limited company: Similar to a limited company, the SRL combines the flexibility of a small business with the protection of limited liability. The members are liable in proportion to their shareholdings, and the company may be managed either by the members themselves or by appointed directors.
Public limited company: In a public limited company, the capital is divided into shares and the shareholders’ liability is limited to the amount of their investment. This is usually an option for larger companies with a more complex ownership structure. It requires the convening of a general meeting and the election of a board of directors.
Co-operative: In a co-operative, members work together to achieve common economic and social objectives. Every member has a say in decisions, regardless of their financial contribution. Co-operatives can take various legal forms depending on the country and the specific legislation
Civil society: This type of partnership is usually made up of professionals (such as doctors, lawyers, etc.) who join forces to provide services together. The partners’ liability may be unlimited or limited, depending on the specific structure.
Community of property: It is a form of association between individuals who come together to jointly own and manage certain property or assets, without forming a separate legal entity, such as a company. In a community of property, the participants share ownership and, often, the management of that property, but do not establish a formal legal structure for the association.
What criteria should you use to choose the best legal structure for your business project?
Choosing the appropriate legal form is a strategic decision that must be based on a careful analysis of the following criteria:
Legal and financial liability: assess the level of liability you are prepared to accept. Legal forms such as a limited company or a public limited company offer limited liability, protecting the owners’ personal assets, whilst others, such as a sole trader, entail unlimited liability.
Size and nature of the business: Consider the size and nature of your business. Larger companies may benefit from more complex structures, such as public limited companies, whilst small businesses may opt for simpler forms, such as sole traders or limited companies.
Number of members or owners: the number of people involved in the business can influence the choice of legal form. Limited companies and public limited companies allow for multiple shareholders, whilst a sole trader is an option for businesses with a single owner.
Tax burden: analyse the tax implications of each legal structure. Some offer tax advantages, whilst others may be subject to higher tax rates. Consult a tax adviser to understand how each structure will affect your business’s tax liability.
Flexibility and formalities: Consider the level of flexibility and the legal formalities required by each legal form. Some, such as sole traders, are more flexible but may offer less legal protection, whilst others, such as public limited companies, may have more formal requirements.
Ease of management: assesses the complexity of managing the business. Some legal forms, such as sole traders, are simpler to manage, whilst others, such as public limited companies, may require more elaborate management structures.
Capital requirements: sets out the capital requirements for setting up and operating a business under each legal form. Some may require a minimum capital, whilst others may be more flexible in this regard.
Growth forecasts: Consider your company’s growth prospects. Some legal structures are better suited to growing companies that plan to seek investment or list on the stock exchange.
Nature of the activity: Certain business activities may be subject to specific regulations that affect the choice of legal structure. Make sure you understand how the relevant laws and regulations might affect your business.
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