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4 Legal business structures

Updated on May 9, 2014

Many people desire going into business but don’t know the types of legal structures available. I have prepared this hub to help your understand the type pf legal structures available to help you choose the one that fits your business interest.

Knowing the different types of legal structures help you register your organization under the appropriate structure for tax benefits.

Companies

Being in business means that you will often see organizations whose names end with the word ‘Limited’. For example. Telikom PNG Limited. A company may be managed by a board of directors, appointed by the shareholders.

The liability of a company is limited to the assets if the company only and not its shareholders. Unlike the sole trader, your investor’s personal assets are not at risk in the event that the company fails. For instance, if you held 100 shares at K8 per share in company XYZ Limited and if the company folds, then you only loose K800 worth of stocks.

Sole Trader

Under this structure, you may own and manage your business activities by yourself. Of course you can employ people but they only work for you. For instance you may name your business like Joel Clark’s bookshop. There is no limitation of liability and your personal assets could be at risk. What do I mean here? Sole traders have unlimited personal liability in the event the business failure. As a sole trader, all your assets are potentially t risk during working life, should your business fail. It is wise to start as a sole trader and then upgrade to other more appropriate structures that safe guards your business and personal assets in the event of business failure. You are in business to make profit and the last thing you want to do is to let other people taking away your assets and you can’t do anything at all because you owe them.

Companies are legally obliged to pay taxes and it’s your duty to find out what taxes are applicable in PNG and how you can best minimize your taxes and maximize profit.

History has it that no taxation system in any one country is never perfect. Financially intelligent people look out for tax loopholes and benefit from it. I don’t mean to say you do all you can to exempt tax. We are must pay taxes for the betterment of PNG. But there are legal ways to protect your assets from high taxation in PNG so that you maximize your profit.

Partnerships

Under partners commit capital assets, time or both, to the partnership business and in return share the profit depending on the agreed revenue sharing ratio. Unlike companies, partners in a partnership business don’t do not have limited liability. In the event of business failure, assets of both partners are at risk. Never enter into business partnership unless you really know and trust your partner. You must know that at all times; you are liable for your action and that of your partner. Whatever, either one of you does, affects the other.

Trusts

A trust may involve several people who have common interest in investment. Those that set up the trust are known as settlors. Those that are supposed receive the benefits are known beneficiaries.

The basic principle of a trust is that the settlors may vest some or all their property into the trust for the benefit of the beneficiaries. Trustees manage the trust and risks are limited to the trustees.

Business in PNG is presented with a plethora of opportunities that didn’t exist before. Globalization and emergence of e-commerce is changing the face of business in PNG. You should consider these global trends as your structure your business to take full advantage of the winds of change and grow your wealth and retire wealthy.

Summary

There you go. The 4 legal structures of business.

1. Company

2. Sole trader

3. Partnership

4. Trusts

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    • Ian Dabasori Hetr profile image
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      Ian D Hetri 3 years ago from Papua New Guinea

      Accounting is a good topic bro. Accounting, law and taxation are key topics to be mastered by aspiring entrepreneurs. In here, accounting can be a good earner if you stream it down to a specific niches. I find finance, relationship and health good earners, most of which being green hub. The type of article that can ne read many years from now. Holla me on Facebook if you need some tips on keyword analysis.

    • profile image

      R-Bonhart 3 years ago

      Very true, Ian. What else can we say? It's our education system that keeps on rolling out emplyees but not employers. Keep up your blogs and I will be blogging soon about a simplified accounting for the informal sector.

    • Ian Dabasori Hetr profile image
      Author

      Ian D Hetri 3 years ago from Papua New Guinea

      Bonhart,

      Appreciate your time here. Many of our brothers and sisters in PNG are infect bit of ignorant to practical insights like this. Most only believe about the university education which isn't bad. What I discovered long ago is that university only teaches us to earn a job. Not to create jobs. Iam yet to find a university in PNG that teaches entrepreneurship and even financial investment as core or majors. Ofcourse we create more employees than employers every year. What is needed a practical skills about business and investment.

      A good point you made. I will definitely produce something on the market mix.

    • profile image

      R-Bonhart 3 years ago

      This is great. Brief and to the point. I hope that the rural areas of Papua New Guinea follow your blogs to gain business basics here because alot find it difficult to attend Business and Administrration courses to learn it. Please post more regarding the 6 P's of marketing, etc. I think some sources have the 8 P's of marketing. I believe you'll do that soon. :)

    • Ian Dabasori Hetr profile image
      Author

      Ian D Hetri 3 years ago from Papua New Guinea

      Thank you Hackslap. Appreciate your comment. Different people have different preference and i guess the key decision is choosing the structure that gives one more tax benefit..

      Cheers

    • Hackslap profile image

      Harry 3 years ago from Sydney, Australia

      Good information re business models ... My personal preference is being a sole-trader or setting up a trust fund ..