This week we commence the Series on “Doing Business in Dominica”. We will explore this topic from a variety of angles. This week we focus on the types of business arrangements.
Starting a business is usually the realisation of a dream; something a person wanted to do for the longest while. Sometimes it is born out of necessity and at other times, from opportunity. Regardless, however, of the origin of the business idea, to be successful, one has to consider the form of business: sole proprietor, partnership or company. This decision is influenced by several factors, including the vision of the company, the level of control desired, the capital required to start the business, tax considerations.
In this issue, we explore the advantages and disadvantages of the forms of business.
There are three main forms of business ownership and organisation:
- Sole Proprietor
- Partnership
- Company
The Sole Proprietor is the easiest form of ownership, and no formal registration is required. The business and the owner are one. The advantages include the owner has full control in the management of the company and all profits flow to the owner. The profits of the business increase the tax liability of the owner and the losses reduce it. The major drawback of this form of ownership is the lack of separation of ownership from the owner. The business and owner are considered one, though operating under a different name. The owner is liable for all debt of the company and personal assets of the owner can be used to settle debt of the business. Other disadvantages may be the difficulty in raising capital required and in recruiting high caliber employees.
The Partnership is similar to the sole proprietor except that it is owned by two or more persons. The main distinction is that a partnership can hold assets in its name. Partners, like the sole proprietor, are liable for the debts of the partnership and the actions of partners. This means that even if the other partner incurred the debt, the other partners are liable for the debt. The law does not make a distinction between a sole proprietor and a partnership. This is why it is critical for partners to draw up a Partnership Agreement which stipulates the parameters of the partnership, example, the contribution and role of each partner, the limits of liability, the decision making process, the resolution of disputes, the admittance of new partners, the termination of existing partners and the dissolution of the partnership.
The advantages of a Partnership include the complementary skills and competencies of the partners, ability to raise more funds and the ease of establishment. The disadvantages include as mentioned earlier, the joint and individual liability for the debt of the partnership, the sharing of profits, disagreements with partners and dissolution of the partnership on the death or withdrawal of a partner depending on the Agreement.
Some of the disadvantages may be offset by the establishment of a limited partnership, which limits the exposure of some partners to their investment in the partnership.
The Company is a legal person with a right to acquire assets, to sue and be sued in its name. It is a separate person from the owner and does not dissolve when ownership changes. The owners are called shareholders. Shareholders elect a Board of Directors who create policy and make decisions on behalf of the company. A company has to be registered and Articles of Incorporation outlining the directors, nature of business, address of the company. The registration of the Articles of Incorporation has to be done by a lawyer. The key difference between a company and the two other forms of ownership is that the company is seen as a separate person and private assets of owners are protected from settling the debt of the company. This is the key advantage of this form of business. It should however be noted, that shareholders may use their personal assets to secure the debt of the company and in this case, if the company fails or defaults in payment, those assets may be used to settle the debt.
A company may have a sole shareholder. One may choose to register a private limited company or a public limited company. The difference in the two forms lies in in the fact that the filings of a public liability company are public. Companies, whether public or private liability companies are required to file Annual Returns with the Company’s Registrar.
The advantages include the separation of owners’ assets from that of the company; shareholders are not held liable for the debt of the company (directors and officers however may be held liable for their actions) and the ability to raise capital through the sale of shares. The disadvantages stem mainly from the process, as it is more costly to incorporate a company and the annual return requirements are higher.
It is recommended that irrespective of the type of business formed, proper recordkeeping is maintained, separate accounts are kept for the business so one can evaluate the success of the business and owners/managers of the business equip themselves to manage effectively. It is also recommended that the business name is registered, thereby ensuring that the name cannot be used by another person or company. It should be noted that annual returns must also be filed for the Business Name.
Next week God willing we examine the elements of writing a Business Plan. I thank you for your comments and expressions of sympathy last week on the passing of my dear friend. Until we meet again, may God continue to keep us in the palm of His hands.
Valda Frederica Henry, VF Inc.’s CEO and Principal Trainer is a Chartered Financial Analyst (CFA), Certified Global Professional in Human Resources (GPHR), Certified Myers Briggs Type Indicator (MBTI) Practitioner, holds a PhD in Industrial Relations & Business, a Masters in Business Administration and a BSc Management Studies. VF Inc. is a Human Resource & Finance Consultancy firm with a Training and Recruitment arm, and the producer and host of a live TV program “The Cutting Edge of Business”.
I thought the article would include pointers as to the best sources to access information on starting up in Dominica. Nonetheless a good article I look forward to learning more
Thank you Dr. henry,
Wishing to get involved in the film and art business in Dominica. Any views on this industry? is it a profitable field?
Thanks Doctor.
Thanks doctor
The writer started of great with a person having an idea and a passion for going into business; however, she got carried away with explaining the various types of business formation. (I think)? I’m hopeful and looking for her to talk about researching your idea (to avoid common mistakes), and the real Dominican business experiences, from persons who do business here and what do they think? My take on reading this article is fear from going into business. She may also want to note that business training is difficult to implement, and being familiar with the environment maybe your best chance.
Why dont you talk about all the red tape and the stealing of business ideas from authorities.
two thumbs up . .love the level of simplicity that was applied in explaining the subject.i live in the us but heavily leaning to returning home to open a business.after reading your piece i realize i am not insane and smoking a pipe dream!!
Noticing many small businesses with names which includes Inc. at the end of the name. Are they incorporated or is it just fashion. I do not understand this too well. Hoping to do some reading on it too. However, your input would be appreciated. Thank You!
Thanks Doc, very positive information, that’s we need in D/ca, the highly educated sharing their knowledge and experience
this woman is doing a good job, I hope she gets an award
Looking forward to next week’s article.
great….anticipating nexts weeks article
i have learnt a few things here so i’ll use my new knowledge to improve my business. thanks doc .thank you so much. looking forward to next week.