Launching a Business? Choose the Right Legal Structure
A major factor to consider when starting a business is the legal structure. In Rwanda, your business can be a sole proprietorship, a partnership, or a corporation. The structure you select will impact the kind and number of shareholders (co-owners of the firm) you can have, your personal accountability for business debts, and the costs of beginning and maintaining your business.
Learn more about these structures and their advantages and disadvantages.
- Sole proprietorship:
This structure is usually best when a single entrepreneur launches a business. On the plus side, it is easier to set up and register a sole proprietorship, and as the sole proprietor, you retain complete control over the business’s operations. A major plus is that ongoing compliance responsibilities are limited since you are not required to have general meetings, submit yearly reports, or file annual returns.
The primary drawback of being a sole proprietor is that you are personally accountable for all business obligations, including debts, which can put your personal assets at risk should you find your business in financial trouble.
- Partnerships:
This form of legal structure has only been allowed in Rwanda since early 2021. It is an alliance of 2 or more people who agree to conduct a business together. Each individual invests money, property, effort, and expertise in the firm and anticipates a share of the gains and losses.
Partnerships have low startup costs, are simple to create, and members share the profits. Owners are taxed only on their own personal income. If a partner wants to leave the partnership, they may withdraw from their corporate interests.
On the downside, personal liability may still be an issue. Raising more funds and finding acceptable partners are also sometimes challenging.
- Corporation
A corporation is a legally recognized entity that enables the entrepreneur to separate personal assets from your business. This means that people who invest in the firm (shareholders) are only liable for the business’s debts up to the value of their investment. As a result, it is a highly effective method of attracting investment without risking your personal wealth. However, it is the most expensive legal business structure to form, is highly regulated, and requires considerable record keeping. Finally, there is double taxation, first on company profits and then on your personal earnings.
This is a quick review of the legal structures available to you when starting a business. For more advice, seek a legal or tax specialist if you have any specific concerns.