Which business option should you choose
As a result of the challenging job market and tight financial crunch affecting the country, graduates of tertiary-level institutions as well as established professionals are increasingly exploring the possibility of starting their own business ventures in 2014. As prospective business owners, it is important to consider the various business vehicles available and the legal requirements and implications of choosing one over the other.
The main options are sole proprietorship, partnership and a company. In choosing the type of business vehicle to establish, one must take the following factors into account:
- Purpose of Business
- Capital Needs
- Size and Scope of Business
- Appetite for Risks
- Number of Persons Involved
The sole proprietor or sole trader is simply an individual operating a business as himself. Sole proprietorship may be used for most types of businesses. The advantages include the absence of formalities in the organisation of the business and very little regulation. On the other hand, it can be risky as the sole proprietor contracts in his own name and his personal assets are fair game for satisfying business debts.
The most important legal requirement is that where the sole proprietor wishes to use a name other than his own for the business, he or she must register the name under the Registration of the Business Names Act.
An individual may opt for an alternative to the sole proprietorship to take advantage of the net worth of other persons. One such alternative is the partnership in which two or more individuals join together with the goal of making a profit.
There are several advantages to forming a partnership. These include greater opportunity for capitalisation, risk sharing and balanced decision-making among partners. Additionally, compared to a company for example, partnerships are easy to form and maintain as there are no legal requirements for meetings, appointment of officers and filing of annual returns.
However, in a partnership arrangement, there is unlimited joint and several liability of all the partners involved. This means that each partner may be sued for debt owed by, or claims made against the partnership. Additionally, an agency relationship exists among the members of a partnership, which means that each partner may bind the other partners in contract.
Another downside to a partnership, especially when all partners have an equal interest, is the possibility of conflict as a result of the various personalities involved.
The partnership relationship results from a contract, which can be expressed or implied. The contents of partnership agreements often provide for the following clauses, as well as others:
- Commencement and Duration of Partnership
- Capital Contributions of Partners
- Division of Profits/Losses
- Admission and Expulsion of Partners
- Management of Partnership
- Accounts and Banking Arrangements
- Dispute Resolution
A partnership may be terminated by dissolution or winding up of the business. If the partnership is registered under the Registration of Business Names Act, one of the partners should notify the Registrar of Companies that the business has been dissolved.
A company is a legal entity in its own right, separate from the person or persons who brought it into existence. In most countries, a company can engage in similar activities as an individual. It can acquire assets, enter into contracts in its own name, sue and be sued.
The process leading to the incorporation of a company is one of registration under the Companies Act, which ends in the issue of a Certificate of Incorporation by the Registrar of Companies.
Who can form a company?
One or more persons can form a company by filing Articles of Incorporation with the Registrar of Companies and otherwise complying with the requirements of the Companies Act in respect of registration.
Types of Companies
The types of companies that may be formed are companies limited by shares, companies limited by guarantee and unlimited companies.
The required documentation, which must be sent to the Registrar to facilitate registration, include:
- Stamped Articles of Incorporation
- Notice of Appointment of Director
- Notice of Appointment of Secretary
- Notice of Registered Office
Declaration of Compliance
Prospectus and Supporting Documents (Public Companies)
The main advantages of incorporation is the limited liability of members of a company. This means that the liability of the company is separate from the personal liability of a member whose assets cannot be seized to pay company’s debts. Additionally, a company has perpetual succession until it is wound up, and therefore it doesn’t die with its members.
A company provides greater opportunity for raising capital by way of a floating charge, which attaches to the company’s assets, thereby allowing it in the interim to be able to use these assets.
Some of the disadvantages to forming a company include less privacy as there are statutory obligations for annual public filings, annual meetings and election of directors and officers. There is also the issue of loss of control, particularly as it relates to public companies.
The Companies Act stipulates that the name of the company should have ‘limited’ as the last word of the name in the case of a company limited by shares or by guarantee. It further specifies that a company shall not be registered by a name which, in the opinion of the Registrar, is undesirable. In fact, a company name will not be registered if it is identical or similar to an existing company name or if the name is misleading.
Given that a company is an artificial person, it requires the hands and minds of actual persons to act on its behalf. Directors therefore perform the managerial function of a company while the members/shareholders of the company have ultimate decision-making powers, which they delegate to directors.
For guidelines concerning the incorporation of companies, see the Companies Act and the Companies Office of Jamaica website.