The laws of Trinidad and Tobago require that all businesses be registered. However, there are several options available to choose from. The advantages and disadvantages of the three (3) major options are discussed in this article.
The three (3) major legal structures that apply to businesses in Trinidad and Tobago are as follows:
- Sole Proprietor
- Partnership
- Limited Liability Company
Sole Proprietor
The Sole Proprietor is the simplest legal structure. It involves just one individual who owns and operates the business.
The advantages of being a Sole Proprietor are:
- The owner reaps all profits from the business
- The owner is not obligated to consult with anyone regarding management of the business. The owner can make all decisions.
- There is relative freedom from government control and special taxation. The income of the business is considered as the sole proprietor’s personal income, so it is only taxed once.
The disadvantages of being a Sole Proprietor are:
- The owner has unlimited liability for all debts of the business. All personal assets of the owner are therefore at risk.
- Death of the owner automatically closes the business
- Raising money as a sole proprietor can be difficult.
Partnership
A partnership is an association of two or more persons to create a business for profit. All partners are owners of the business based on the terms of their agreement.
Articles of Partnership are normally prepared to establish the contributions of the partners as well as the role of each partner in the business.
The advantages of being a Partnership are:
- Legal formalities and expenses are less than for the creation of a limited company
- Decision making and operations are shared among the owners
- There is relative freedom from government control and special taxation. The income of the each owner is only taxed once. The income of each partner represents their share of the profits and is considered as their personal income.
The disadvantages of being a Sole Proprietor are:
- At least one owner shares unlimited liability for all debts of the business. All personal assets of this owner is therefore at risk.
- The partnership ends when one owner dies or when one partner wants to dissolve the partnership.
- Each partner is an agent of the business, and their acts are binding on each other.
Limited Liability Company
The limited liability company is an independent and distinct legal entity, with an identity separate from the individuals who own it.
It is expensive to set up and it must comply with a number of government regulations and tax laws. This results in a number of documents to be filed to accommodate registration. A lot of documents also has to be filed during the life of the company, usually on an annual basis.
The advantages of being a Limited liability Company are:
- The liability of the owners is limited to the amount of shares bought in the company. The company’s debt is not considered to be that of the owners, so personal assets are not normally at risk
- The company has a separate legal existence. It has its own income tax number and it is taxed separately.
- Limited liability companies have an indefinite life.
- Ownership status can change as shares can be traded
- Capital is easier to raise in a limited liability company
The disadvantages of being a Limited Liability Company are:
- There are a number of government laws and regulations to be observed
- It is costly to set up a limited liability company
- Owners of limited liability companies are taxed twice. The business is taxed on its earnings while the owners pay tax on the dividends that they receive from the company.
Conclusion
We’ve learned about sole trade, partnership, and limited liability, and hopefully, you now have a clearer understanding of each option. Remember, the type of business structure you choose will depend on various factors, such as your goals, financial resources, and risk tolerance.
