Self employment: the business entity
Self employment entails a lot of responsibility and discipline but can also be an extremely rewarding experience. Selecting the type of business entity is the first step in setting the parameters for success. There are several types of self employment or business entities that you can select from.
Types of business entities
The sole propriety is the simplest form where the entrepreneur and the business unit functions as one. It is the easiest and most effective way to start a business. Once you open a business account and register for tax, you are on your way. The account normally states Mr. X trading as Name of business. You don't have a tax account that is separate from your business. You and the business are seen as one. The benefit is lower accountancy costs, but the downside is that you have to be disciplined in your finances since you can easily overspend in your personal capacity, which leaves your business without any running capital. This type of business entity is ideal for a one man show.
The second type of business entity is that of a private company where more than one person become shareholders in the business entity. The private company is a legal person on its own and you will pay tax in your personal capacity and the business will also pay tax. The private company is well suited for two or more persons. It does entail more tax and stricter record keeping.
In certain countries you can also start a close corporation or CC which can be used for one or more persons, but it differs from the sole propriety and partnerships in the sense that the CC is also a legal person. Your personal account and the business tax account are separate. This is ideal for small businesses where there is more than one person or when you want to keep your personal income separate from the business to protect your assets in case of a lawsuit or bankruptcy.
The partnership is normally used with legal firms and entails working together. It has a tremendous risk since you are liable for any debt or decisions made by your partner. If you can, you should avoid this type of business entity.
Decide what you want to do
Before you select the business entity type, decide what it is that you want to sell, produce or offer, how many people you want in management and what your long term goals are. If you are the biggest asset, for example, you want to start a freelance writing business where you do copy editing and ghost writing for other companies, then you most probably don't need a CC or a private company and can stick with the sole propriety.
If you plan a building and construction service, it will be best to go for a private company or a CC since you need to keep your personal finances separate from the business entity. Where you will need to purchase products on credit, it will be better not to have a sole propriety since the suppliers are more comfortable with a more formal business entity. If you will have to employ several people, you should aim for a private company. Home businesses can be run as sole proprieties with ease.
There are no clear guides to the best type of business entity, but your goals, type of service or product, location and people involved are the factors to consider before you select the business entity type. List all the deliverables and evaluate the benefits and disadvantages for each type before you make your decision.