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How to found a company.There are various options.
The two most common ones are:
Sole Proprietorship Limited Liability CompanyLet me explain these structures, and try to make it clear which one to go for
Sole Proprietorship (1/10)This company structure is the easiest to get started with.
It is a company that is owned by a single person, and there is no legal distinction between the owner and the business entity.
Sole Proprietorship (2/10)Founding a Sole Proprietorship is uncomplicated. Most often, it can be done online, and your company can be up and running in less than 24 hours.
In most countries, no minimum capital is required.
It only costs a small fee to get started.
Sole Proprietorship (3/10)Most countries are required to add VAT to their prices when selling products and services.
This is also the case for Sole Proprietorships when reaching a certain level of revenue each year.
Note that you may need to register for VAT upon creation.
Sole Proprietorship (4/10)The money earned through a Sole Proprietorship is not taxed separately from any other income the owner may have.
That means, that all money earned is taxed as income, just like a regular salary.
This is the type of income that is taxed the highest!
Sole Proprietorship (5/10With a Sole Proprietorship, you have unlimited liability.
This is extremely important to be aware of!
If your company suffers any financial loss, lawsuits, or get into debt, you - as the owner - carries the full financial responsibility!
Sole Proprietorship (6/10)This means that if your company gets into severe trouble, you may end up undergoing personal bankruptcy, which may include any personal assets such as cars, house, stocks, and shares in other companies to be confiscated!
Sole Proprietorship (7/10)It is possible to hire employees in a Sole Proprietorship, but because of the unlimited liability, it becomes very risky and is not recommended.
Instead, collaborating with other Sole Proprietorships as B2B, is much more common.
Sole Proprietorship (8/10)Let's sum it up.
Easy to set up Does not require any capital Does not pay VAT up until a certain level
Earnings are taxed as income Owner takes full financial responsibility Not recommended to hire employees
Sole Proprietorship (9/10)So, to conclude:
If you want to start a business, but you either find the whole thing intimidating and confusing or don't really know if running a business is something for you - a Sole Proprietorship is a perfect way to get started!
Sole Proprietorship (10/10)However, unless your business is just a hobby, or stays very small, I highly recommend transforming into a Limited Liability Company.
Read on below
Limited Liability Company (1/11)A Limited Liability Company requires a little more initial work to set up.
It is not recommended to set it up on your own, so you will require help from an accountant or a lawyer to get the paperwork correct.
Of course, this comes with a fee.
Limited Liability Company (2/11)A Limited Liability Company is its own legal entity.
This means that the company operates on its own and that its finances are completely separated from its owner(s).
Limited Liability Company (3/11)A Limited Liability Company issues shares.
It can be owned by a single person or multiple people.
For instance, the company can issue 100 shares.
If a person owns all 100 shares, that person owns 100% of the company.
Limited Liability Company (4/11)If the company is owned by multiple people, the share amount becomes important.
Let's say that person A and B own a company together.
Person A owns 75 shares and person B owns 25 shares.
Limited Liability Company (5/11)Person A is now entitled to 75% of the profit when dividends are paid out, and person B gets the remaining 25%.
Big decisions are taken at board meetings.
Person A has 75% voting right, which can overrule person B in case of disagreements.
Limited Liability Company (6/11)When founding a Limited Liability Company, you are required to invest an initial share capital.
The minimum required amount varies greatly from country to country.
In Switzerland, the minimum is around $20K.
In Ireland, there is none at all.
Limited Liability Company (7/11)A Limited Liability Company is required to have at least one director (CEO) and one secretary.
In most countries, the same person can be both the owner, the CEO, and the secretary.
This/these person(s) need to be publically registered.
Limited Liability Company (8/11)With a Limited Liability Company, the owners do not take personal responsibility for the companies finances.
The only financial risk that the owners carry, is the initial share capital that is invested. Hence, the name "limited" liability.
Limited Liability Company (9/11)The money that is earned is liable to corporate taxes, which are typically significantly lower than income taxes.
After these are paid, the earnings can be reinvested in the company, or in assets such as stocks or properties.
Limited Liability Company (9/11)The owner of a Limited Liability Company can be paid in two ways.
Either by being an employee of the company and pay yourself a salary.
Or by paying yourself dividends by the end of the year.
Limited Liability Company (10/11)Salaries and dividends are taxed differently, and a professional accountant can help you determine which one will be the most profitable in your case.
Limited Liability Company (11/11)Let's sum it up.
Can have multiple owners Owners take limited financial responsibility Earnings are taxed way lower It's more complicated to set up It requires a minimum share capital
The advantages of a Limited Liability Company are many.
If you are serious about starting a business, I definitely recommend that you consider a Limited Liability Company as soon as possible!
If you are serious about starting a business, I definitely recommend that you consider a Limited Liability Company as soon as possible!
In upcoming threads, I'll talk a bit more about:
Benefits of a holding company.
Credit assessment when owning an LLC vs. Sole Proprietorship.
Best practices when distributing shares between two owners.
(Is 50/50 the best way to go?
)
Stay tuned for more
Benefits of a holding company. Credit assessment when owning an LLC vs. Sole Proprietorship. Best practices when distributing shares between two owners. (Is 50/50 the best way to go?
)Stay tuned for more