When starting and running a business, there are many legal requirements you need to address. First you have to choose your business’s legal structure. This will define the amount of taxes you pay, the legal obligations you have to follow, the legal risks you may encounter, and your liabilities. If you have already started your business, you may also want to reconsider whether the legal structure you are using is adequate for you.
Although the type of legal structures available vary in each country, the most common business structures include sole traders or entrepreneurs, partnerships, and limited liability companies and corporations.
Sole traders or entrepreneurs
• This business form is typically simple to operate and to set up. In certain countries, there are requirements for registering this type of business in a company register or with the tax authority, while in other countries no registration is required.
• In general the business and the entrepreneur have no separate legal capacity or structure. This means that the personal assets of the entrepreneur could be at risk if the business incurs unpaid debts or if a customer suffers damages in relation to the products or services offered.
• A sole trader is therefore generally considered as a taxpayer and not a separate legal entity.
• There are typically fewer administrative formalities and tax returns in comparison to partnerships and companies. In some cases, the business is not required to charge value added tax if the turnover remains below a certain threshold.
• Partnerships are usually divided into general partnerships or limited liability partnerships (LLPs). The main difference is that general partnerships are usually not considered a separate legal entity, although they nevertheless may hold rights and incur liabilities. Under LLPs, the partners may limit their responsibility to their contributions, as opposed to a general partnership in which partners have unlimited and joint liability with their personal assets.
• Under a general partnership any partner can represent the business when dealing with third parties, while in an LLP, management of the business is left to the managers. However, in some jurisdictions, an LLP may allow two categories of partners: full liability partners who represent the partnership and limited liability partners who have no right to manage.
• General partnerships are usually easier to set up and may not require articles of association, although they are always advisable, and may not require minimum capital contributions. LLPs may require a minimum contribution for incorporation purposes in some jurisdictions.
• Reporting requirements are also simpler for general partnerships. For example, typically only annual financial statements are required and potentially only if the size or profit exceeds a certain threshold.
Limited liability companies and corporations
• Limited Liability Companies (LLCs) or corporations are more sophisticated structures that need articles of association (depending on the jurisdiction, this is sometimes in the form of a notarial deed) and need to be registered with a company register. The biggest advantage is that they are separate legal entities that limit liability to the shareholders’ capital contribution.
• In general, establishing an LLC is easier with fewer administrative requirements compared to management of a corporation.
• LLCs may or may not require a minimum capitalisation and external auditors. Corporations do require minimum capital contributions, of which at least some percentage must be paid upon incorporation, and the appointment of external auditors.
• In both structures, the shareholders have the power to decide on material matters such as increasing the capital or modifying the articles of association. The ordinary course of business is left to the directors or managers appointed by the shareholders for this purpose, who are the legal representatives and act in the name and on behalf of the company or corporation.
When choosing your business’s name, brand logo and slogan, make sure you are not infringing on anyone’s intellectual rights. Research whether there are any other businesses with the same name or similar logos. Taking someone else’s idea could damage your business and attract lawsuits.
• When you select a name and brand logo, trademark them with the relevant authorities so you can be sure no one takes your idea in the future and uses it for their business.
In order to open a business, you may need to obtain different permits and licences. For example, a retail business may need a sales permit. Research which are needed for your type of business with your relevant government authorities.
If you are expanding your business abroad, research the local legal requirements. Doing business in different countries means that you will have to adhere to their laws and regulations.
Legal risk management
Legal risk management refers to managing the risk of making legal mistakes which could result in serious consequences for your business. Your business could face litigation or experience financial penalties or reputational damage. Create a system for identifying necessary legal actions and possible disruption so you can handle them before they escalate.