Possible business structures in Niue
Small businesses in Niue generally choose to operate as a sole trader, partnership or limited liability company.
A sole trader operates a business on his or her own. The trader controls, manages and owns the business and is entitled to all profits but is also personally liable for all business taxes and debts.
Usually a sole trader can establish the business without following any formal or legal processes and can employ other people to help run the business.
Many businesses start as sole traders and then progress to the company structure as the business grows. Others form companies right from the start to take advantage of the protection and other benefits offered by the company structure.
- Easy to start and to run
- Owners have unlimited liability for all business taxes and debts, putting their personal assets at risk
- Sole traders can lack credibility in the marketplace
- Harder to attract loans and investment
- Harder to sell the business
- The business only lasts the lifetime of the sole trader.
Partnerships are most common among professional people and in the farming industry. In a partnership 2 or more people run a business together. Each partner:
- Shares responsibility for running the business
- Shares in any profits or loss equally, unless the partnership agreement states otherwise
- Is liable for any debt within the partnership
Many partnerships are established with a formal partnership agreement.
Once the standard business structure of professional people (lawyers, doctors and accountants), partnerships are no longer as popular as in the past since the company structure is now open to professionals and arguably offers better protection. A well thought out partnership agreement is essential to cover contingencies and possible conflicts.
- Can be an effective way to share business operation costs (e.g. several professional people operate out of a joint office).
- Partners may be liable for debts incurred by other partners
- Putting personal assets at risk
- Possible partnership conflicts
- Possible complications if a partner dies, or wishes to leave the partnership.
Limited liability company
Companies help foster confidence in businesses by governing the relationships between investors (shareholders), directors and creditors and by giving stakeholders a clearer picture of who and what they are dealing with.
A company exists as a formal and legal entity in its own right. Companies can be registered (incorporated) through the Niue Companies Office.
The limited liability company has proved to be the most popular and successful form of business structure. The primary reason for selecting a limited liability company is the protection that it affords to shareholders. This is because once a company is formed; it is regarded as a separate legal entity from its shareholders.
This concept of limited liability becomes important if the company is unable to pay its debts and a liquidator is appointed. Shareholders of a limited liability company are not liable for the business debts of the company unless:
- They have not fully paid for their shares prior to the company being placed in liquidation. In this case they are liable to the liquidator for any unpaid money owing on their shares.
- They have given personal guarantees to lenders or creditors, such as banks or suppliers.
- They are also directors of the company and have ‘traded recklessly’.
By contrast a sole trader or a person trading in partnership will always be exposed and personally liable for business debts that cannot be met by business funds.
- More credibility in the marketplace.
- Easier to attract funds and investment (investors can become shareholders).
- Easier to sell the business or pass it on to others as it is a separate entity.
- The shareholders' liability for losses is limited to their share of ownership of the company (except when company directors have given personal guarantees for company debts or where a company has been trading while insolvent or is considered to be ‘trading recklessly’).
- Directors need to clearly understand their responsibilities.
- Limited liability advantages are often eroded in practice by the need to provide personal guarantees to lenders or creditors.