WHEN you’re looking to start a business, one of the first things you need to do is to choose a business structure that is right for you.
The three common business structures are:
* sole trader;
* partnership; and
* company.
We’ll look at each one in turn and you will see how doing your taxes changes according to the business structure you choose.
Not only will this decision have an impact on how much you pay in taxes, but it will affect the amount of paperwork your business is required to do, the personal liability you face and your ability to raise money.
In this article we will look at the various types of businesses in Fiji and the risks associated with them.
Sole Trader
A sole trader business structure is a person trading as an individual and is legally responsible for all aspects of the business. This includes any debts and losses, which can’t be shared with others. This is the simplest and relatively inexpensive business structure that you can choose when starting a business. As a sole trader, you’ll generally make all the decisions about starting and running your business, although you can employ people to help you.
Key advantages of a sole trader business:
It is simple to set up and operate and also gives you full control of your assets and business decisions. Sole trader business also requires fewer reporting requirements and is generally a low-cost structure.
Persons operating a sole trader business can use their individual tax identification number (TIN) to lodge tax returns and you will not require a separate business bank account unlike a company structure. However, you should keep all your financial records for at least seven years.
To register a sole trader business, a person has to download and fill Form S from FRCA website and lodge it with FRCA. The supporting documents needed to register are: birth certificate and any identification card.
Partnership
A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business. Because a partnership has more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement.
Advantages:
* It is easy and inexpensive, shared financial commitment. In a partnership, each partner is equally invested in the success of the business; and
* partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money.
Disadvantages:
* the liability of the partners for the debts of the business is unlimited;
* each partner is “jointly and severally” liable for the partnership’s debts, that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts; and
* Each partner is also liable for the debts incurred by the actions of other partners.
The persons entering into the partnership business will have to fill Form B with their business registration certificate and identification cards. The applicants will have to clearly state the nature of business they would like to conduct. Tax returns for partnership businesses should be filed at the end of every financial year. The nature of business will determine the type of taxes payable.
Limited liability company
A limited liability company (LLC) is a corporate structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities. Limited liability companies are essentially mixed entities that combine the characteristics of a corporation and a partnership or sole proprietorship.
Advantages:
* the obvious advantage of a limited liability company is the financial security that comes with business. The company’s shareholders will only be liable for any debt the company accrues according to the levels of their own investment and no more. This can provide a comfortable feeling of security for investors in the company.
Disadvantages:
* because of the nature of public limited companies, sometimes disputes will arise between directors and shareholders as their ideas of what is best for the company vary.
* Sale of shares to increase company funds will further dilute the management, as more and more people have a say in how the company is run. There is also a risk (since companies can buy shares) that a takeover might occur this way.
The registration process for a company is similar to that of a partnership. However, the only difference is that the applicants will have to fill form C and a registration certificate from Registrar of Companies, stating the director’s name is a must.
Similarly, the nature of business determines the types of taxes a company pays.
Non-profit businesses
Formed for the purpose of serving public rather than making money.
A non-profit business, also known as a not-for-profit organisation, is an income tax-exempt organisation formed for religious, charitable, literary, artistic, scientific, or educational purposes. It is an incorporated business from which its shareholders or trustees do not benefit financially.
As non-profit organisations, NGOs rely on a variety of sources for funding projects, operations, salaries and other overhead costs.
Tax treatment for charities/non-profit organisations in Fiji.
Income from charities and non-profit organisations are usually exempted from income tax in view of their nature of business or service. This shall only apply if the income derived from such business is not distributed for the personal gain of any of the members, proprietors or shareholders.
Some of them act as government agencies to help government in providing social services.
However, charities and non-profit organisations which operate along commercial lines and those that are directly engaged in competition with other similar organisations may not be exempted from income tax.
To register an NGO, the following requirements must be met:
* name of the NGO to be incorporated;
* name and address of NGO;
* details of the organisation’s registered office;
* description of the trustees;
* the method and date of appointment of the trustees;
* the proposed device of the common seal;
* the prime purpose of the NGO;
* proposed activities;
* details of property that belongs to the organisation; and
* organisation’s by laws
For any queries or more information, contact 679 3243000 or email publicrelations@frca.org.fj
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