Why is Choosing the Right Corporate Structure for my Business Important?

Richard Startup

January 21, 2022January 21, 2022

^{By Gaia Freydefont}

When we talk about a corporate structure, we mean the legal structure and form of a business. The corporate structure indicates the rights, obligations and liabilities the owners may have. It also indicates whether the business is a separate legal entity or not.

Only certain structures attract a separate corporate personality, which means that the business is considered legally distinct and separate from its owners and investors. This impacts the personal liability of the owners.

When a business has a separate corporate personality, the owner has limited liability, and the owner’s liability is limited to what they have invested. So, whoever the business as the entity may owe money to, cannot come after the personal assets of the owner.

However, some structures do not attract a separate corporate personality. In these cases, the owners will have unlimited liability and their personal assets may have to be sold to satisfy any outstanding debts that the business may owe.

The following factors are important to keep in mind when considering which corporate structure best suits your business:

The Management structure: The Management structure will influence how and by who decisions will be made by. Do you envision the decision-making process to include a wider group of people or to be carried out by an individual?
The Ownership structure: If you have more than one owner, then a sole trader structure would not be suitable. If you want an ownership structure based on shares, then a partnership would not be the right structure.
Liability: Where the business does not attract a separate legal personality, the owner will be personally liable for any debts that the business may have.
Funding: The type of structure you choose will also have an impact on the type and the amount of finances available. One type of funding is through the investors, who in exchange of funding, would want shares of the company. This type of funding would not be available for all types of corporate structures, such as sole traders and partnerships.
Tax: Different structures are also subject to different types and different levels of tax.