Trading vs LLC: Which Is Best For Your Business?

So, you're ready to open your business - congratulations! Here’s a few things you'll need to consider when contemplating opening a business.

1. You want to ensure that you are operating legally. What do you need?

A legal company

A valid business license (renewed on an annual basis)

2. You must consider what the company structure will look like.

Sole proprietorship (Trading Company)?

Partnership? Corporation?

Limited Liability Company?

While considering the rewards, take a look at the resulting risks as well.

Business is unpredictable, and it almost always starts on a high note. As with all things in life, there are no straight roads and there are speed bumps and potholes.

Towards this end, at a minimum, you must ensure that the foundation of your business is secure and consideration is given to all of the moving parts.

There are many types of businesses but we want to touch on the legal structure and the associated risks that we often take for granted or overlook.

Trading companies vs. Limited Liability Companies

Over the past few months, while we have been dealing with COVID, we have seen an influx of new businesses formed.

What type of business is yours? Is it a trading company or a limited liability company?

Let's break down the meanings.

Trading

There is no distinction between a trading company and its owner.

A trading company is a company that is owned and operated by a person, and there is no legal distinction between the owner and the business entity.

Does your business license say “Your Name” trading as “Company Name”? If this is the case, then your company is a trading company.

Trading companies are essentially the default company.

These companies are extremely easy to set up and are much more affordable than a limited liability company.

Limited Liability Company

LLCs are distinct legal entities.

A limited liability company, unlike a trading company, is a separate and distinct legal entity from the business owner.

Limited Liability means that there are limits to your obligations. What are obligations? Debts and money owed to others by the business.

If the Company is sued or otherwise, the obligations are limited to the assets of the business and not extended to the individual shareholders.

However, with a trading company, as we described, there is no legal distinction between the owner and the business entity so if the Company is sued, there is no limited liability. The personal assets of the owner as well as the business assets are fair game.

On this basis, a trading company is riskier and given the industry that your business is in - you may want to give consideration to this fact.

If you are selling a product that people have to consume or otherwise use that can impact their health, you definitely should consider incorporating a LLC as opposed to a trading company.

LLCs have more structure

LLCs are more formal in that you must have a Board of Directors, and Members and Officers of the Company.

Then you have management who are involved in the day to day and ultimately reports to the Board of Directors.

The Board of the company is responsible for providing oversight and ensuring that the Company is carrying out its mandate. This is ideal for an entrepreneur who wants to conquer the world. You would have a dedicated team that is committed to your vision and charting the course to get there.

Trading companies are definitely more popular because of the cost factor but consider the risk factor? Is this a risk you can afford to take?

As a start up, it may be practical for you to start out as a trading company. It is advisable that you graduate to a limited liability company once your company grows and revenues are steady and you are now more focused on the futuristic element of the business as opposed to laying the foundation and gaining credibility and building your client base.

It is worth noting that while you pay business license fees for both, with LLCs you must pay Annual Company Fees to the Registrar to maintain the Company registration.

As the LLC is legally a separate entity, all records should be separately maintained.

It is important to spend the time and educate yourself on the differences in business structures and what is ideal for you and your operations.

Let’s consider the following:

1. The industry that you are in and the consumer risks related to your products/services.

2. The ideal company structure based on the identified risks - if a LLC is not affordable at the time you commence business, you must keep this on your list to do as soon as practicable.

3. Building generational wealth. Do you want to have a business to leave to your children or do you want the business to end with you?

4. Future of the business. Do you want to remain a one-man band or do you want to go corporate?

Envision where you see yourself and your business. This should be a driving force in your decision making. Don't think only for today. Think about 5 years from now. Think about 10 years from now. Build the invisible bridge to get there.

Remember, success in your life, business, and finances remains within your reach!

Your beaming idea is like a seed. Be careful where you plant it and how you treat it because it will determine if and how it grows. Nurture, care for it and focus on those things that will add to its growth and development. You're focused on laying the foundation at this time. Once that foundation is secure, you then have to focus on building.

Contact us

Contact us to discuss your business and develop the necessary foundation so that with business growth, you are focused on those things the owner should be focused on - the future of your company.

Don’t forget - our goal is for you to win in your finances!