There are two main types of business entities:
- Sole proprietorships (also called sole traders) and Partnerships
- Corporations: they are called Limited or plc in the UK, SA or SARL in France, GmbH or AG in Germany…
Corporations differ from proprietorships because they form a legal entity that is seperate from its owners / shareholders. When corporations do business and sign contracts, they do it in the name of the corporation, not in the name of the shareholders. They can be sued as a seperate legal entity – whereas when a proprietorship or partnership is sued, it is the owern or partners that are actually sued, as there is no legal distinction between the owners and the business. Typically, corporations also provide limited liability protection, although in some countries you will find partnerships that also have limited liability (e.g. LLP in the UK). Also in corporations there is seperation between those who own the business (shareholders) and those who run it (management team) whereas in proprietorships and partnerships, the owners are the management.
Choosing the right legal form for your business is a trade-off. There is no perfect legal form for all purposes. Typically, legal forms differ according to the following criteria:
- Different level of capital requirement (proprietorships typically have no minimum capital requirements)
- Different liability (proprietorship: personal liability of the owners; but there is insurance)
- Different taxation
- Different formalities for registration / incroporation
- Different reporting requirement (P&L, B/S, Cashflow: yes or no)
- Different amount of work (paper work, admin!)