The company is the preferred business structure today, but why? I’m sure you’ve come across many adverts (day for tenders) or licensing requirements that insist on the incorporation of the bidder or applicant. You may have also been encouraged to incorporate by mentors, other people in business or the man on the street corner. Let’s look at the reasons why the company in the preferred business structure and why you should incorporate if you haven’t already.
Company structure
The company structure allows the division of ownership into multiple units known as shares. The minimum number varies can be as low as 100 shares without a ceiling on the maximum number. These can be owned by a single individual or be distributed amongst multiple owners.
Advantages
Separate Legal entity
The company is a separate legal entity and for all intents and purposes a legal person. That means that a company is viewed as a person and has the rights that a person has in the view of the law. The advantages of this will become clear shortly.
Limited Liability
The degree to which an owner can lose is limited to their investment in a company. As a legal entity the company enters into agreements and assumes responsibility as a legal person would do; hence assumes the risk of loss by itself. There are exceptions to this which I will explain later.
Divisibility of ownership
The ability to divide its ownership brings its own advantages. By allowing multiple different groups or individuals to benefit in the companies profits you can attract more people to membership. Those are not the only advantages. Ownership is often used to allow access to resources such as intellectual property. You can offer an owner of an idea or technology you want to use ownership in your company to have access to the technology and vice versa. Contrast this with a sole proprietor where the person is the business and you cannot exactly sell part of yourself, legally at least.
Agency
The separation of management and ownership, or at least the ability to do so is another advantage of the company structure. The agency relationship allows the company as a separate legal entity to have representatives appointed to act as its management or directors if so desired. While you can appoint managers in other business forms, the company can run completely autonomous of its owners. It can self manage.
Deductibility of expenses
Taxation is a key element of business and business structure decisions are always made with tax law in mind. In accounting rules, we deduct the operating expenses from revenue to calculate profit. For tax purposes, the same calculation is made to determine your taxable profit – if the structure is a company. Sole proprietors and partnerships do not get the same privilege of claiming all expenses related to business. A partnership is considered a conduit and therefore one’s tax is calculated on their share of business revenue. The same applies to a sole proprietor.
Going concern/continuity
The company structure also enshrines the concept of going concern. An incorporated business can continue to operate in the absence for whatever reason of shareholders. This means that it gives a sense of continuity where the business can go on in the event of death or departure of a founder. As a separate legal entity, it can live on in perpetuity.
Funding
Last but certainly not least is the ability to access funding I alluded to earlier on due to the divisibility of ownership. Just as part of the company can be sold off to allow access to intellectual property or economic rights the same can be done to access funding by selling some equity. Business is tough and expansion can be expensive, the company structure is the best.
Disadvantages
Cost
The cost of registering a company is no small amount for the humble start-up in this economy. We also happen to be in a country that is one of the hardest in the world (number 176 out of 190) to get a company registered. So it will cost you time as well. In addition to that, there are maintenance costs associated with keeping it going.
Complexity
While I introduced the company as a simple concept it can get complex. Because the company structure has so many advantages it is prone to abuse for the purposes of corruption. As such companies have many complex rules around them. It is important to understand what you are getting yourself into. Many struggle with the idea of separating the business from its owner/s here. Get sound advice on which is which.
Scrutiny
Due to the factors noted above companies also receive a lot of scrutiny. Depending on the size of the company, measured by the number of members or revenue, there are certain extra requirements and disclosures that you will need to make. Companies must file accounts with Zimra in order to receive tax clearance for example. There are many requirements that would not be visited upon the other structures.
Should you incorporate?
Absolutely! The benefits of incorporating far outweigh the disadvantages. Incorporating will not guarantee your business success but it will certainly mean very few doors are closed to you, at the very least.
