Following my piece on how and why you should register your start up business a lot of people pointed out that they had no idea what some of the terms I used in the article meant.
Now there is something that I had not anticipated but how was I supposed to know that most of you dozed through your business related classes at school?
Anyway, I have created the following cheat sheet which I use in my intro to business classes complete with the necessary tech terms with the hope that some of you will find it useful.
What is a business?
We start with a soft one. A business is any activity that is undertaken with the aim of making a profit or (in the case of governments) to provide an essential service. Business can be divided into:
- Primary sector businesses-deal primarily with raw materials, for example, the extraction of lithium to make batteries
- Secondary sector businesses-i.e. manufacturing businesses like Samsung
- Tertiary sector businesses provide services e.g. your website design business
There are a lot of names for businesses e.g. entity, firm, organisation, company, enterprise, corporation etc. Usually each name has a specific connotation.
Forms of businesses?
Just as they are different types of cats: you have tigers, lions, jaguars, pumas and felis the little mouse hunter that lives in your house there are all manner of businesses that have different structures. So in addition to classifying businesses into sectors as above we can divide them into forms the most common of which are:
- Sole trader– this is when you start doing business in your own name or using a special trading name. You and your business are one and the same. If you die the business dies. If the business owes people money you owe people money. If the business fails to pay people will come take your sofas and sell them.
- Partnership – When you and your buddies gang up to form your business. You and your business ares still one and the same. If one of buddies quits, your business ceases to exist, if anyone of you dies the business dies, if you owe people money people will not just take sofas they will even take Fluffy the cat until the debt is satisfied.
- Limited Liability Partnership – Is no different from the partnerships above except only one of you (at least) gets to lose their private property.
- Company – Operates as separate legal entity i.e. the business has a life of its own and is treated as a person to the extend that a business can be treated as a person. For example instead of your name appearing in contracts the company’s name appears in it. The company can take you to court. Owners are known as shareholders since they own a share of the company. This share is also known as a stake; not a steak. Shares are also known as stock (not to be confused with goods bought for resale which are properly known as inventory). If you die the company survives, if the company incurs a debt you only lose the amounts you have invested in the company (limited liability)
- PBC – is like a company ie. it has a life of its own and will not die when you die for example, it can take you to court even though you are its owner, can have contracts in its own name etc. The stake of the owners is expressed as a percentage instead of in terms of shares.
More on company and PBC gobbledygook
Liability- these are amounts your business owes to other people/businesses that have to be paid at a future date.
Limited liability-you only lose the amounts you have invested in the business. For example if you start your company using $500 and the company incurs a debt of $10 000 you only lose the $500 and your Sofas and Fluffy are safe. They will not be sold by creditors to pay that debt. There are limits to this right:
a) Your total liability as shareholders is limited to a minimum of $2 000 if you are operating a company. If your company goes under you will have to cough up a share of this amount based on the percentage of the company you own.
b) This is related to the above. If you owned shares you had not paid for, you will still have to pay that amount.
c) As the owner you have to demonstrate that you acted in utmost good faith when you were conducting the affairs of the business otherwise you will be sued for fraud, negligence and other lawyerly stuff that will see you losing your sofas and Fluffy the cat which will be sold to pay up the debts beyond the amount you invested
Point c) is meant to make sure you don’t register a Credit Card/Get a loan and go on a shopping spree while hiding behind limited liability. If you do this once the creditors you owe money have finished taking it to the cleaners they can come after you in the company’s name (remember the company can sue you to pay app). Think of this in terms of a robot that’s turning against its creator.
The Certificate of incorporation – this is like a company’s birth certificate.
Shares – a unit of ownership within a company. Think of these as bytes when measuring the size of a disk.
Capital – the money and equipment that is used in running the business
With these facts in mind, I will now attempt to give you the advantages of turning your startup business into a PBC or company.
Advantages of a PBC and Company in layman terms
- If you/one of your co-owners leaves or dies your businesses continues uninterrupted. I am sure you know what happens when a rich person dies. There is a frenzy as friends and relative fight over the estate. If you don’t know what I mean try renting a dead breadwinner’s house.
- The business is a separate legal entity. You can take advantage of this by say registering each one of your business ideas/startups as PBCs or Companies if it fails you can declare bankruptcy without it affecting your personal life or other ideas/startups. It explains why Donald Trump gets to be a billionaire even though a good number of his businesses went bankrupt and some still owe people millions.
- It makes you look professional. Sole traders/Partnerships are associated with amateur hour. A registered business shows that you believe in your idea(s) enough to at least invest in them. People will only take you seriously if you take yourself seriously.
- It’s easier to open a business account, enter into business contracts e.g. registering for Paynow Visa/MasterCard payments.
- You can offer employees a stake in the business. Google, for example, paid its employees using shares/stock in the company allowing them to run the business on fumes when times were tight. It also motivates your employees to work harder as the company’s fate is tied with theirs.
- You can offer investors/venture capitalists a stake in the business in exchange for capital.
- You have limited liability. You get to keep your sofas, laptop and Fluffy the cat when your business goes under.
While running your business as a PBC/Company is all roses you should remember that roses have thorns and if you are not careful you can prick your finger on these thorns which can be fatal if you are a hemophiliac (don’t know what you are doing).
- It’s expensive- although a PBC is much cheaper to register, registering a company can cost you north of $300
- You have to pay taxes. Who am I kidding you have to pay taxes even when you are running a sole trader/partnership business. With companies/PBC you might end up paying taxes twice.
You can also … sigh, what am I saying? The short story of it is running a business can be hard and it requires skill and purpose. It is a lot like running up and down the dark alleys of C. If your head is reeling from all the information you should know this is not even the half of it.
In the next article, we will look at how you can form a PBC.
Featured image credit: newsdzezimbabwe.co.uk