Sole Proprietorship or Company?
Many businesses are started without proper understanding of the financial, legal and tax impact based on the type of legal entity. There are three main types of legal entities that could be considered to start a new business in Maldives; sole proprietorship, partnership and limited liability company.
In Maldives, the companies are registered and governed under Companies Act 10/96 partnerships are governed and registered under Partnership Act 13/2011 And sole proprietorships are registered and governed under Sole Proprietorship Act 19/2014.
It is important that, every entrepreneur choose a proper legal entity suitable to their business needs. There are various factors that could be considered when choosing a legal structure:
- Amount of investment required
- Shareholders/investors rights
- Potential risks and liabilities of your business
- Expansion plan of the business
- Expenses involved in maintaining the business
- Tax benefits available for different business structures
The opportunities for raising finance for a company is high as the number of shareholders in a company can vary from 2-20 shareholders compared to a sole proprietorship. The companies are considered as independent legal entities, with more than one shareholder, having more legal requirements including special requirements prescribed in tax laws.
If a business startup has more than one partner, it is important that the partners/shareholders interests are protected. The companies act and partnership act grants the right to protect the partners/shareholders rights.
When choosing a business structure, it is also important to consider the potential risks and liabilities of your business. If a business ventures into an industry where the risk is high, it will be in their best interest to form an entity that provides limited liability. This will protect the shareholders of a company from potential unexpected liabilities, shield their personal assets from business debts and claims, and provide more financial and legal protection than a sole proprietorship.
The registration process for a sole proprietorship and partnership is easy and less costly compared to a company. With a company, significant paperwork is involved in the registration process. Also, for a company there are various annual filing obligations that must be fulfilled.
The companies and partnerships have more tax benefits compared to a sole proprietorship. A company is allowed to deduct salaries of the shareholders up to 15% of specified profit, while a sole trader is not allowed to deduct his or her salary in the business profit tax computation.
Therefore, it is advisable to evaluate these factors before establishing the business.
Our team at Crowe Maldives can assist you to choose the best legal structure for your business and help you through the registration process.