Choosing the right legal structure is one of the most important decisions a business owner can make. It determines how the business is taxed, how it’s managed, and how the owners are protected from liability. The choice of legal structure for a fashion business depends on various factors, such as the;
- Business size,
- Capital strength,
- Tax implications,
- Liability protection, and the
- Goals of the business owners.
In this article, we’ll take a closer look at the most common legal structures and help you choose the best one for your fashion business.
The fashion industry in Africa is largely considered to be an informal industry, largely because there are clusters of lifestyle businesses in the fashion industry in Nigeria and Africa at large rather than start-ups.
A lifestyle business is financed with personal funds, small business loans, and loans from friends and family. A startup venture may begin similarly; however, the business is structured to facilitate outside capital from investors.
In starting up a lifestyle business, a brand most often than not will begin with a Business Name Registration, and this is usually subjected to a limited availability of capital. Business name registration has several benefits among which include;
- It requires little capital
- It is easy to register
- It requires fewer formalities
- A sole person can register a Business name
- The profit of the business is solely owned by the owner
- Tax liability in the Business name is minimal
- Decision-making is easier with a Business name. ie No need for board resolution or annual meetings.
- Level of ownership, shareholding, investment, and interest are not publicly recorded
- The easy conversion process. i.e. a business name can be converted to a limited liability company, in the event the business expands rapidly.
With working with a business name, you should be open to growth. Being open to growth will be having a business plan which clearly defines the growth system of your brand, thus you will be aware of the best time to apply a conversion process in order to convert from a Business Name to a Private Limited Liability Company.
If you intend to build up a Start-Up, then you would need to have your business registered as a Private Limited Liability Company.
I will shed some light on the difference between a Lifestyle Business and a Start-Up
A Lifestyle Business is typically a small business that is primarily designed to support the owner’s personal goals and lifestyle. The owner of a lifestyle business often has a specific set of skills or interests that they turn into a business that can provide a comfortable income and flexible schedule. These businesses are often self-funded and don’t require outside investment. The primary goal of a lifestyle business is to create a sustainable income stream for the owner while allowing them to maintain a certain lifestyle.
On the other hand, a startup is a company that is designed to grow rapidly and scale quickly. Startups typically have an innovative product or service and are often focused on disrupting an industry or creating a new market. They typically require significant funding and investment to get off the ground, and the goal of a startup is often to achieve a high valuation or to be acquired by a larger company. Startups are often risky and require a lot of hard work and dedication to succeed.
In summary, the main differences between a lifestyle business and a startup are their goals, growth potential, funding requirements, and risk profiles. A lifestyle business is focused on providing a sustainable income stream and flexibility, while a startup is focused on growth and scale, often with the intention of creating a significant return for investors.
In order for the fashion industry to shift from informal to formal, fashion creatives have to approach their businesses from a start-up perspective. This will include commencing the business of fashion in the right way by carrying out pre-start-up research, carrying out market research, developing a business plan, and developing a pitch deck.
To commence a start-up, you will need to have your business registered as a Private Limited Liability Company. In order to get international funding from other regions, you might be required to have your company registered in the US or in the UK. In the end, it is all dependent on the long-term goal of your business.
Here are some benefits of a private limited liability company;
- A private limited liability company is a separate legal entity and it is a separate person in the eyes of the law.
- A private limited liability company is a legal entity that can sue and be sued in its name. This means that the company is held separately for any wrongdoing. Any legal action is filed against the company and not its directors.
- A private company has the advantage of giving the opportunity to an investor who does not wish to be actively involved in the running of the business to invest capital into the business.
- Unlike a business name whose powers and functions are performed by an individual, a private company limited by shares has checks and balances. Hence, the control of a company is in the hands of the board of directors or by shareholders in their shareholding capacity.
- There are laws that govern the internal affairs and contain the objectives of a private company limited by shares, which are enshrined in the articles of association of the company. Unlike the business name which has no laws guiding its activities, all decisions are taken by the proprietor(s) of the business.
So to answer the question “What is the best legal structure for a Fashion Business?”
The decision is yours. However, this is subject to your business plan and long-term objectives for your business.
Let me know in the comment section if you have registered your business…