11/07/2024
Business Tips for Startups-What type of business to register and its implications. By Greenhills Partners Law Firm, Buea
As a startup, after determining it is time to begin a business, the next important question to be answered is what kind of business organization to start. As a follow-up on our previous article on this Start-Up series on “The Importance of Business Registration for startups”, we will like to answer the question about the kind of business to register.
Many entrepreneurs get very excited about being called a “CEO” or “the Boss” and with that excitement, rush to open companies without being properly guided. For the purpose of this write-up, we will be focusing on business organizations that is Sole Proprietorship and Partnerships on the one hand (called Enterprises in the Cameroon context) and Companies (Private Limited, Public Limited and Simplified Joint Stock Companies) on the other hand as types of business organizations, to know the advantage of registering one over the other, so that every individual can decide for himself, which business type is most suitable for him.
Enterprises .
As highlighted above, there are two types of enterprises that an individual can choose to register. Either a Sole Proprietorship or a Partnership.
A Sole-Proprietorship otherwise known as one-man-business is a form of business operated by an individual with the aim of making profits. Many people choose this kind of business because it is easier to form and register and also cost effective. Also, the sole proprietor has the right to make whatever business decisions he wishes without necessarily consulting people as is the case with other business organizations. This saves time and makes the business run faster. However, this kind of business has many disadvantages. The business may not continue after the death of its owner because he oversees the management and all activities of the business alone. Also, the business is not a separate legal entity from its owner and so the owner does not enjoy limited liability. This means that creditors can go after the owner’s personal funds to recover their debts.
Partnerships on the other hand involves two or more persons coming together to do business with the aim of making profit. This is advisable for entrepreneurs who do not have sufficient capital to start the business. They can combine resources with others to form a partnership. This will help them get a strong hold of a target market. Most of the risks involved in a Sole-Proprietorship is absent in a partnership for example, the business does not end with the death of the partners. They may decide that the business will continue in perpetuity with the sucessor of the deceased partner. Also, the liability is borne by both partners jointly and severally. Except the partnership is eventually registered as a Limited Liability company, it is not a legal entity. So, the partners can be held for the liabilities of the business. However, in other jurisdictions like the USA, there are provisions for Partnerships to be registered as a Limited Liability Partnership (LLP). This kind of business regime is similar to a private limited company because the partners are liable for the business debts only to the extent of their capital contribution to the business.
It is worth noting that, due to the complex nature of human beings when it comes to doing business, for a good partnership to thrive, there should be a PARTNERSHIP DEED which clearly sets out the terms and conditions of the partnership and also determines what happens after the death of a partner. This will entail the services of a lawyer to properly advise the partners and draft the deed, prior to registration of the business.
Companies
Companies on the other hand is a business organization which is duly registered in compliance with the laws governing business in the country. In Cameroon, it is governed by the OHADA Uniform Act on Commercial Companies and Economic Interest groups. This law recognizes a Public Limited Company, a Private Limited Company and most recently the Simplified Joint Stock Company regime that was created in 2014.
A Private limited company or Private Company limited by Shares (Abbreviated as Ltd or SARL in French) is a company in which the liability of the business is limited to share capital contribution of each member. Thus, the company must have a share capital of at least one million (1,000,000FCFA) as provided for by the Uniform Act. Here, creditors cannot go after the personal assets of the shareholders for the debts of the company.
The benefits of registering a business as a Private limited company are enormous, especially for start-ups. Most Angel investors and venture capitalist prefer to invest in businesses that have been registered as private limited companies because it affords them the opportunity to invest in private equity and receive returns on investments and dividends, sit on the board of the company in taking decisions, the right to transfer shares to the public is restrained so their position is secured in the company, banks feel more secured lending to such businesses because they have a corporate structure.
A Public Limited Company (abbreviated as PLC or S.A. in French ) on its part also has limited liability of each member to the amount of shares he has taken and his rights are represented by the shares. It must have a share capital of at least ten million francs (10,000,000fcfa) and this capital must have been fully subscribed before the date of signature of the Articles of Association by the members. A Public Limited company is allowed to invite the public to buy shares. In addition to that, there are statutory requirements and formalities that must accompany public limited companies, which are not present in any other business. Public Limited Companies are mostly incorporated by businesses operating on a large scale as well as financial institutions.
Finally, a Joint stock company (Socièté par action simplifié also abbreviated as SAS) is new company regime that has been recognized in Cameroon. It is very similar to a private limited company but unlike a private limited company, it does not have any statutory minimum share capital. The share capital is prescribed in the Articles of Association as agreed by the members upon subscription to the Articles of Association of the Company.
In light of the foregoing, every individual knows what he intends to achieve in his business so it is incumbent on him to act upon the facts above to determine what business is best for him. Some factors that may determine the choice of business are: the nature, size and extent of the business, the desired number of members, whether or not you want to sell shares to the public or receive private equity investment as well as the other advantages/disadvantages mentioned above. It is best to seek legal advice from a Lawyer to guide you on what business is suitable, based on statutory requirements.
Frinwi Gwenelyn Achu Esq
Corporate Attorney@ Greenhills Partners
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