Classifying a business: Factors affecting choice of legal structure

Question 1

What are the factors that affect the choice of legal structure?

Answer 1

size
ownership
finances

Question 2

How does size affect the legal structure?

Answer 2

As sales increase and the business operations grow to meet this higher level of customer demand, the business owner may need to select a more appropriate legal structure. Most businesses begin their life as small or micro business enterprises. Therefore, the legal structure that is most suitable at this stage would be either a sole trader or partnership. If sales continue to increase, and the business keeps on growing, then further expansion will be needed and the business becomes a medium-sized one. The business will need to purchase new plant and equipment, which requires the injection of more money. Therefore, a partnership or private company may be formed with the new partners or private shareholders bringing with them extra finance, skills and expertise. If expansion is rapid, then the owners may wish to seek the protection of limited liability, in which case the private company legal structure will be chosen.

Question 3

How does ownership affect legal structure?

Answer 3

if owners want complete control then being a sole trader is the only realistic option, however partnership is ideal for owners wishing to share with other owners. A high private company would also allow the owner to maintain a high degree of control over who can become a shareholder of the business.