Before you start your business, it is important to choose the right business structure. Your business structure determines how the organization performs and how it functions on a day-to-day basis. It is also important because your business structure has legal and taxes ramifications in Botswana.
Although they also apply in other parts of the world, we will cover the business structures in Botswana as well as their pros and cons.
- Sole proprietor
- Private Limited Company
- Close Corporation
A sole proprietor is a business owned and operated by one person. It is a common form of business structure and the simplest business structure to set up. It has few legal requirements.
Pros and Cons of a Sole Proprietor
1. They are easy to set up with few requirements.
2. Decisions are quicker as there is one owner.
1. Sole proprietors do not have limited liability.
2. It’s difficult to attract financing from banks with this business structure.
A partnership business structure has a group of individuals between 2 and 20. All owners contribute capital to the business and have an equal say and profits in the business. Partnerships can be set up with a verbal or written partnership agreement. In a partnership, the owners manage and control the business.
Pros and Cons of a Partnership
1. There are a good number of sources for raising capital.
2. Partners share the liabilities and responsibilities of running the business.
3. You are not alone in the business.
1. You share profits with partners.
2. Partners do not have limited liability (only offered in select countries).
3. If one partner decides to leave the partnership will dissolve unless there is an agreement in place to allow the business to continue.
4. The number of partners has a limit in some countries.
Limited Liability Company
A Limited Liability Company (LLC) is a separate legal entity from its shareholders. The main difference between a partnership and an LLC is that business assets are separate from shareholder assets. This insulates the owners from the liabilities and debts of the company.
The company accounts and contracts as a legal entity. So you can trade LLC shares and do not affect the existence of the business.
Limited liability companies can either be private or public.
Generally, the difference between the public LLC and the private LLC is in the availability of the shares. Basically, with a public LLC, the shares are available for the public to buy and in a private LLC, they are not.
So to trade a private LLC you need the consent of the other shareholder, and in a public LLC, you do not need consent.
Pros and Cons of an LLC
1. There is no limit on the number of shareholders.
2. All shareholders have limited liability.
3. LLC can raise capital from investors and are more likely to get loans from the banks compared to other business structures.
4. The ownership structure depends on the value of capital contributed by each shareholder.
5. Low tax rates and exemptions can apply to an LLC depending on the present economic climate of the country or state.
1. Setting up an LLC has more legal requirements compared to sole proprietors and partnerships.
2. You can only trade shares with the consent of the other shareholders.
3. Annual returns have to be filed with the registrar of companies every year
Cooperatives (close corporative) are formed by a group of people pooling their resources together. All members of a cooperative have one vote and help in running the business. With the cooperative business structure, members shareholders share the profits equally.
Cooperative can take the form of producer and retailer cooperatives. Some cooperatives exist to take advantage of buying in bulk from suppliers and enjoying the economies of scale.
A close corporation is like a private limited company but quicker to startup. It has fewer rules and regulations to form and manage.
Pros and Cooperative
1. The only need with the registrar of companies is a founding statement.
2. Members are also managers.
3. In a close corporation everyone has one vote regardless of their investment.
4. The Close Corporation is a separate legal entity.
1. Close corporations limited to 10 members.
2. Making a decision can take longer because there are many owners.
3. The business structure is not suitable for scaling (large business).
4. Getting financing may be difficult to get.
5. The business model is not suitable for founding members.