Sole Proprietor versus Limited Liability Company

Starting a business comes with a myriad of decisions to make.  One of the many choices new business owners have to make is the legal structure of that business.  Your choice of a legal structure will depend on the nature and complexity of business you are looking to run.  Ghana offers a number of business structures which I list below:

  • Company limited by shares
  • Company limited by guarantee
  • Business partnerships
  • Business name registration (Sole proprietorship)
  • Unlimited liability companies

The Registrar General’s department website describes each of these structures and gives examples of the kinds of businesses each type is usually used for.

For this piece, however, we will focus on the practicality of choosing between a sole proprietorship and a limited liability (company limited by shares).

Scenario 1: Let’s say you had this brilliant idea start a training service. Your goal is to train corporate clients in Accra. You intend to hire a couple of professional trainers to help you but this is a business that you do not anticipate bringing in partners or investors at any point in time. You also don’t want to deal with too much paperwork from the governance and statutory standpoint. Well, then a sole proprietorship works fine for you.

A few things to note:

  1. You will be liable for income taxes for all income realized after payment of all your enterprise’s expenses (so please get advise from a qualified accountant).
  2. You, as the business owner, is directly exposed to any liability (financial or legal) that the business incurs. Unlike limited liability companies, there is no limitation to this exposure. (This means you are personally responsible for any debt that the business will incur. If the business is sued, your personal assets are not protected).
  3. Because the absence of a legal governance structure, investors will normally not put their money in a sole proprietorship

So while the administrative workload for a sole proprietorship is relatively light compared to that of a limited liability company, it is important to be aware of the personal unlimited exposure.

Scenario 2: You want to start a business selling fresh vegetables to local supermarkets. You ask your friends to chip in some money and also commit some unpaid time to the business in exchange for some ownership. You also anticipate that you may bring in additional investors in the future. In this case, a company limited by shares may be the best option. Ownership of the business can be allotted by proportionate number of shares with governance rules ensuring protection and statutory compliance.

Some points to note:

  1. Unlike the sole proprietorship where you can register the business all by yourself, the limited liability company requires at least one shareholder, two directors, an auditor and a company secretary at the time of registration
  2. This legal structure requires at least one filing per year with the Registrar General’s department and multiple filings with the tax authorities, making it slightly more tasking to run
  3. Unlike the sole proprietorship, however, the business owners’ personal assets are protected from any losses or liabilities incurred by the business. The exposure is limited to the amount of capital that the business owners put in the business. The only instances where personal assets may be at stake is when a court establishes that business owners may have used the business to defraud others.