Creating the legal framework for your business

As you start your business you will have to think about its legal structure. For a business still starting out the options are a sole proprietorship, a partnership or a company.

A sole proprietorship is the simplest: a business that exists as an extension of its owner. Typically this legal structure is used by businesses with only one person in the business. There is no set up involved in a proprietorship, but there are some significant downsides. You are personally liable if the business fails. This means your business’s debts are your debts.

The problem with other people is that they very rarely think the same way that you do. Partnerships can be difficult for small businesses.

Eitan Stern

If you start a business with others you may consider a partnership instead. This is done by setting up a partnership agreement. Like a proprietorship the partnership is not a separate legal entity, so all of you are liable for the debts of the business. Typically law firms are setup in this way. It is advisable to consult with a lawyer to create a partnership agreement that is legally valid and satisfies all parties.

For most new businesses the best way to start is by registering a company, which operates as an entity separate from its owners (i.e. the shareholders). The benefits of this is that a company offers some protection from liabilities to the people who own it.

In the next section we look at how you register a company.