While treading on your road of entrepreneurship, one question you may face is whether it’s more advantageous for you to start a business as a sole trader or via a company. What follows lay down the pros and cons of forming a company, which information may help you to make your decision.
If you structure your business as a company, you’ll have the following advantages:
- Limited Liability: As the company is a stand-alone entity, separate from its shareholders, in case it goes into financial difficulty, the assets and personal finances of shareholders are protected beyond the value of their shareholding. This means that if a company fails to pay debts, the shareholders will only have to contribute according to the nominal value of their shareholding. It can be as small as Tk.100 (Taka One Hundred) or Tk.10 (Taka Ten).
2. Continuity: Once formed, a company continues in perpetuity regardless of the change in shareholders, directors, management, and employees. If they leave, retire, die – the company remains in existence. A company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies.
- Accessibility to funds: New investors can be brought on board by easily issuing new shares, transfer or sale of shares, all of which can be undertaken with a relative ease. Hence, obtaining funds in a company is much easier than obtaining funds in a sole proprietorship or partnership.
- Taxation: Unlike the sole proprietors, during payment of taxes by a company on its profits, there is a wider range of allowances and tax-deductible expenditures that can be offset against a company’s profits.
Disadvantages of operating as a limited company:
- Expensive set up: More documentation and upfront costs are necessary during formation of the company;
- Double taxation:When distributing dividends out of profits to its owners (shareholders), companies deduct taxes at source. This is the first taxation. However, if the receiving shareholders are individuals, they must also pay taxes for this distribution on their personal returns. This is the second taxation of the same money.
- Stricter regulatory requirements: There are many legal regulatory provisions on how a company should be run, most deriving from the Companies Act, 1994, Securities and Exchange Ordinance, 1969, Securities and Exchange Commission Act, 1993 (and rules and regulations promulgated by Bangladesh Securities and Exchange Commission from time to time). For example, a company must have a board of directors, hold meetings at fixed intervals, and file certain records every year etc. in order to be regarded a compliant entity. If you intend to raise funds, it is always advisable to be compliant from the very beginning of your business.