Decide Your Business Structure

Choosing your business structure is one of the most critical steps in starting your business. A business structure determines many operational decisions in your business, including tax structures, liability protection mechanisms, and the level of complexities in your business. For businesses already in operation, owners need to undertake some assessment procedures to make sure that the business structure in operation remains the ideal structure.

What is a Business Legal Structure?

A business legal structure is a formal classification of business forms that regulates various aspects of the business. Common legal structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each structure provides different advantages and disadvantages and has different legal, financial, and tax implications for the business and its owners. Startups may use their attorneys and tax consultants/experts on what applies to your business.

1. Sole Proprietorship

A Sole Proprietorship is one of the informal and unincorporated business forms, the other one being a general partnership. It is the simplest business form that you can set up.

What is Sole Proprietorship?

A Sole Proprietorship comprises two words, ‘ sole’ means ‘one’ and ‘proprietorship’ means ‘ownership.’ Thus, a sole proprietorship is a business structure that allows one-person ownership. A sole proprietorship is another form of informal and unincorporated business structure, the other one being a general partnership.   A Sole Proprietorship lacks separation between the business and the business owner.

Characteristics of Sole Proprietorship

Before you decide to go for a sole proprietorship form of business, please take time to understand the standard features of a sole proprietorship. A sole proprietorship business has the following common characteristics:

  • One person ownership
  • 100% of the profit or loss belong to the owner.
  • 100% of the debt or risk of default is the owner’s responsibility.
  • The business does not operate as an entity separate from the owner.
  • Tax computation is on individual tax rates.
  • The owner signs all business agreements in his or her name.

Features that Best Describe a Sole Proprietorship Business

If your business has the following features, you may think of starting with a sole proprietorship business structure.

  • If you think of Small businesses with low profits,
  • A Small business with low risk or financial loss possibility,
  • If you had a Small business with a customer base coming from friends, family members, and neighbors,
  • Small businesses are born as a result of hobbies to business,
  • It is a one-man business hence paying tax on the basis of personal income tax rates.

What are the Advantages and Disadvantages of a Sole Proprietorship?

Let’s know the advantages and disadvantages of a sole proprietorship to facilitate your informed decision.


  • No money or energy required up front to form a business. Many big companies started as sole proprietorships.
  • Taking 100% share of profit
  • It is easy to start as there are no complex legal procedures to follow.
  • Not much paperwork involved right from the start and during operations.
  • No hierarchical procedures required in operations since it is a one man business.
  • It is easy to exit the business as you may decide to dissolve the business without requiring any paperwork.


  • Lack of personal liability protection: If the business is sued or defaulted on a debt, individual assets will be at risk.
  • Lack of tax benefit: Under sole Proprietorship, the tax becomes expensive since the sole proprietor, depending on the country’s tax rules, pays both income tax and employment taxes.  
  • Limited business growth potentials: Business growth goes together with risks. Thus, you either change the form to formal or refrain from growing.
  • Low credibility: Most formal business operators doubt the credibility of most sole proprietors. Thus, it is rare to find a business relationship between a sole proprietor and a government agency.

These are general rules applicable to the business community all over the world. We advise you also to visit country-specific issues to complement the guide.   Visit the following links to find more details on sole proprietorship:- Selecting a Business Structure: The case of Sole Proprietorship; What are the steps to establish my own sole proprietorship business?; What are the Advantages and Disadvantages of Sole proprietorship?

2. Partnership

A Partnership business structure is a business structure that allows two (2) or more people to operate a business as co-owners and share the profit and loss that result from the business by following the Partnership Deed.

What is Partnership?


A partnership is a business structure in which two or more individuals own the business. Thus, a partnership business consists of two or more persons who agree to combine their resources to form a business. People who combine resources to start a business also agree on how to share risks, profits, and resources.

Types of Partnership

We categorize partnerships depending on the relationship between partners and on the basis of the level of separation of business and personal assets.

Based on the relationship between partners

Depending on the relationship between the business and the business owner, there are two types of Partnership business; general partnership and limited partnership.

General Partnership

A general partnership is a partnership whereby two or more individuals agree to start and operate a business in such a manner that partners share everything equally. For general partnerships, all partners have a right to participate in the management of the partnership (unless otherwise agreed).

Limited Partnership

A limited partnership is a partnership form whereby two or more partners agree to start and operate a business in such a manner that one partner has control of operations and the other person(s) contribute to and receive part of the profit or loss. A limited partnership is mostly ideal for those running family partnerships who can allow one partner to speak and operate on behalf of the family.

Based on the level of Separation between the Partners and the Business

The separation between the partners and the business refers to the liability structure of the partnership. On this basis of the level of separation between partners and the business, there are two types of partnership, namely; Limited liability (LLP) and Unlimited liability partnerships (ULP).

Limited Liability Partnership

As the title suggests, a limited liability partnership denotes the separation between the business and the owner. In this case, the personal assets are different from the business assets. Thus, an LLP is a body corporate and legal entity separate from its owners/partners. Under the LLP arrangement, the Partnership is liable to the full extent of its assets, leaving the liability of the Partners limited to the Partners’ agreed on contribution to the Partnership.

Features of the LLP

  • An LLP contains elements of both a corporate structure as well as a partnership firm structure’
  • LLP is thus a hybrid between a company and a partnership.
  •  An LLP is characterized by organization and operations based on the agreement.
  • An LLP provides flexibility without imposing detailed legal and procedural requirements
  • An LLP  enables professional/technical expertise and initiative that minimizes financial and business risks.
  • Operating in an LLP structure, facilitate capacity that results in operational efficiency.
  • The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
  • No partner is liable on account of the independent or unauthorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
  • Under LLP, the Mutual rights and duties of the partners and governed by an agreement between the partners or between the partners and the LLP as the case may be.

Unlimited Liability Partnership (ULP)

An unlimited liability partnership denotes a lack of separation between the business and the owner. In this case, there is no clear-cut separation between the partners’ personal assets and the business assets. Under the ULP arrangement, the Partners are personally liable for the liability of the business in case of business and financial risks.

Advantages and Disadvantages of Partnership business structure

Each structure is different from the others and thus has unique advantages and disadvantages. The followings are the advantages and disadvantages of operating a business using a partnership business structure.

Advantages of partnerships

  • Partnerships are easier and less expensive to set up compared to companies.
  • Partnerships combine the resources and expertise of the partners to establish and run the business.
  • Partnerships are simple to administer. Profits and losses are shared between partners according to the partnership agreement.
  • The partnership provides more privacy than companies that have to disclose profits to the public.
  • Changing the legal structure is relatively simple.
  • In the case of a limited liability partnership, the partnership may attract external funding compared to a sole proprietorship.

Disadvantages of partnerships

  • For unlimited liability partnerships, all partners together are personally responsible for business debts. Each partner is individually liable for debts incurred by the other partners. This is known as being ‘jointly and severally liable
  • Tax is charged at the personal tax rate. As business earnings increase, so does the tax rate.
  • Partners cannot transfer their ownership to someone outside the partnership unless the other partner(s) agree.
  • Personal differences may interfere with business.
  • For limited partnerships, the limited partner takes control of the business which may be to the expense of the other partner(s).

What is a Partnership Deed?

A Partnership Deed is a document that contains the terms and conditions of the partnership. The Deed describes the following items, among others.

  • Partners’ full names
  • Partners’ addresses
  • Name of the business
  • Date of commencement of the partnership
  • Office and address of the business
  • The Nature of business
  • Source of capital
  • Share of profit or loss among partners
  • Drawings allowed to the partners and the rate of interest thereon.
  • Amount of salary and commission, if any, payable to the partners.
  • Duties, powers, and obligations of partners
  • Rights of partners
  • Properties of the business
  • Arbitration in case of disputes among the partners.
  • Partners remunerations’
  • Partnership finance and accounts
  • Procedures when one partner retire
  • Procedures when a partner dies
  • Procedures when a partner becomes insolvent

Below is a sample of the partnership deed.


THIS DEED OF PARTNERSHIP made the……day of October 20… BETWEEN……………………………….of …………………………(hereinafter called “the first Partner”) of the one part and……………………………….of………………………………. (Hereinafter called “the second Partner”) of the other part

WITNESSETH that the first Partner and the second Partner (hereinafter jointly called “the Partners”) shall become partners in the business of dealing in lime on the following terms:-

The partnership shall be deemed to have commenced on the…………………and shall continue until determined as hereinafter provided.

The name of the firm shall be………………………………

The principal place of the partnership business shall be located at…………………………or such other place as the partners may from time to time decide.

The business of the firm shall be dealing with ……………………………………and such other business or businesses related thereto as the partners may from time to time agree upon.

The capital of the partnership shall be contributed by the partners equally, and all profits and losses, including loss of capital, shall also be shared by the partners equally.

The partnership Bank Account shall be operated by both partners, and cheques drawn on the partnership Bank Account shall be signed by both of them.

The usual books of account shall be kept properly posted up and shall not be removed by either partner from the place of business without the other partner’s consent.  Each partner shall have free access to them at all times and shall be at liberty to make such extracts therefrom as he may think fit.

Suppose any partner out of the two partners shall die during the continuance of the partnership. In that case, his share in the capital assets and profits shall accrue to and vest in his legal personal representative without any payment.

Suppose any partner desires to retire during the continuance of the partnership. In that case, the other partner shall have the first right to purchase the share of the retiring partner in the capital assets and profit of the partnership at a price of the assets, credits, debts, liabilities, and transaction of the partnership {but with taking goodwill into account} and such price shall be paid by the continuing partner to the retiring partner.

Each partner shall be just and faithful to the other partner in all transactions relating to the partnership business and give the other partner a true account of all dealings.

Neither partner shall, without the consent of the other –

(a)  Waive the whole or any part of any debt or sum due to the partners.

(b) Except in the ordinary course of business of trade, dispose of by loan, pledge or sell or otherwise of any part of the partnership property.

(c) Become a bail guarantor or surety for any person or to do or knowingly suffer anything whereby the partnership property may be endangered.

IN WITNESS WHEREOF the parties hereto have hereunto set their hands and respectively signed these presents the day month and year hereinafter appearing.

SIGNED and DELIVERED by the said          ) A AND B  in my                                            ) presence this ……. day of  October, 20… )                  _________________

Name: …………………………………………….

Signature: ……………..……….….…………….

Postal Address: ……….………..…….…………


SIGNED and DELIVERED by the said          ) X AND Y in                                                     ) my presence this ….. day of  October, 20..)           _________________

Name: ……………………………………………

Signature: …………………..…….…………….

Postal Address: ……….……….…….…………


3. Limited Liability Company (LLC)

What is a Limited Liability Company?

A limited liability company (LLC) is a business structure that provides personal liability protection to business owners while reducing tax and business requirements. The profits and losses of the business are passed through to the owners, and each business owner is required to include a share of the profits/losses in their personal tax returns.

In the LLC, there is no limit to the number of shareholders.  Depending on the rule and regulations of a country, when registering a limited liability company, the entity must file its articles of association with the respective authority where it intends to do business.

Features of a Limited Liability Company

  • Formation of an LLP requires the filing of documents with authorities. In the case of the United States of America, the authority is the Secretary of State.  In the United Republic of Tanzania, the authority is vested in the hands of the Business Registration and Licensing Authority (BRELA).
  • An LLP may have one or more owners called members.
  • A Limited Liability Company can be member-managed, or manager-managed. The feature provides flexibility in operations all the time.
  • All members, managers, and employees of an LLC have limited liability status against the misdoing of other members, managers, and employees.
  • Profits and losses flow through to the members according to the operating agreement, their capital accounts, or local law which is generally proportional to their contributions.


Advantages and Disadvantages of an LLP

It is worthwhile considering the advantages and disadvantages of operating a limited liability company before making your decision.

Advantages of operating an LLC

The following are some of the advantages of setting up a limited liability company.

  • Separate Entity: An LLP is a body corporate distinct from its owners. Owners are not liable for the obligations of the company.
  • Limited Liability advantage: Employees, managers, and members of the LLP are not responsible for any misdoing of each other in operating the company. Members are fully protected.
  • Simplicity advantage: Limited liability Companies come with fewer requirements compared to a corporation. In addition, there is less paperwork involved.
  • The owners enjoy limited liability, which protects their assets from being sold to pay the liabilities of the entity.
  • A limited liability company is not subject to any limitation on the number of shareholders.
  • Members of an LLC have the flexibility of operating as member-managed or manager-managed. However, most members opt to appoint a professional manager to manage the business.
  • In the case of the death of a member, compared to a corporation, the existing members have the flexibility to either continue with the business, close the business or create a new company together.

Disadvantages of an LLC

  • A limited liability company may or may not require legal formalities and an organized manner to run itself. Experience shows that not many would show a great interest in investing in the same as may seem expensive to set up.
  • The entity may need to hire an Accountant and an attorney to ensure that it complies with tax and regulatory requirements.
  • There is a security risk and lack of confidentiality in case of an LLC shuts down for merges with another corporate structure or decides to form a new one.
Powered by TranslatePress