By Victor Nyasulu ConsultantsVNc10250825 – Legal Structure
Did you know that it matters what legal structure you use to do your business? Legal Structure of a business is so important that even your tax strategy is impacted by it!
Today we continue on journey of elements of the Law of MSMEs Success Foundations-LMSF as I discuss the importance of legal structure in increasing the chances of success of an MSME.
Legal structure refers to the legal status that the business has. In Zambia the legal structure that a business can use include Sole Proprietorship, Partnership, Unincorporated Company Private and Public Limited company as well as Cooperatives. Most MSMEs in Zambia do not think twice about what legal structure to use for their project(s).
Is it a wonder that when the UPND Alliance came to power and encouraged the people to form Cooperatives, almost every unemployed youth blindly bought into the idea and formed a cooperative even without thinking about a viable project! Once when I was too “broke” to buy bread in the early days of the UPND regime, my brother made me really laugh when in response to my request for money from him, he jokingly retorted, “just form a cooperative!”
Without due regard to what legal structure should be used to advance and register a business, a legal structure can be so inappropriate that a business ends up being still-born!
As a risk management tool, businesses can implement their business projects by incorporating as opposed to operating as a sole trader, partnership or an unincorporated company. Incorporating leads to the creation of a legal entity separate from its owners and the resulting legal person can sue and be sued being an artificial person. What that most welcome legal ingenuity means is that any debt not settled but beyond the amount for unpaid for shares cannot be directly demanded from the shareholders who are deemed different persons from their company. Of course a costly legal route would have to be pursued in certain circumstances if a creditor is believes that the veil of incorporation must be removed by the courts of in order to hold the otherwise protected shareholders personally liable for the outstanding company debts.
Conversely a sole trader or partnership business is considered the same as the owners who can easily be directly and immediately held liable for unpaid business debts.
That incorporation idea alone really justifies the need for MSME promoters to pay due attention to their business legal structure options!
A sole proprietor/partnership is not required to have a professional accountant or legal practitioner as an organizational secretary. Neither is there a legal requirement for audited financial statements by a Zambia Institute of Chartered Accountants-ZICA registered Auditor.
Apart from the individual/partners need to run professionally, there is no legally imposed costs of compliance when it comes to company secretarial and/or external audits for sole proprietor and/or partnership.Tax efficiency is perhaps the most important factor when it comes to choosing an appropriate legal structure for a business project.
A Sole Proprietor business may be unable to enjoy tax deductible business expenses that are readily offered by the taxation regime of Zambia to limited companies. This may mean that the same source of income carried out under a sole trader legal structure may expose the business to a much higher tax bill than one carried out as either a limited liability company or indeed a cooperative.
Legal structure must therefore, be thought about when setting out to run an MSME or restructuring one as the tax risks are very high when an inappropriate structure is chosen.In conclusion, it must be restated that all MSMEs promoters and/or operators must think about appropriate business legal structures for their projects.
That is necessary in order to avoid unnecessary stress that can literary kill an otherwise viable business! Tax efficiency and other legal compliance matters should provide serious motivations for a robust MSME legal structure.
Naenda ine mafumu!Victor PM Nyasulu is Partner at NS-CGMA. vpmn69@gmail.com +260 955 746 997
