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Types of businesses you can start

One inspiring story about entrepreneurship is that of the launch of WhatsApp. It was founded by Brian Acton and Jan Koum, former employees of Yahoo!

Batanai Matsika

In January 2009, after purchasing an iPhone and realising the potential of the app industry on the App Store, Koum and Acton began discussing a new type of messaging app that would show “statuses next to individual names of the people”. However, instant success did not just come. When WhatsApp was first released to the public, it was very unpopular. The product had a very limited number of users and was crashing constantly.

Their luck seemed to turn around when Apple released push notifications which allowed WhatsApp to notify users once they had received a message.

Improvements on the app

The app was adapted to become an instant messenger app where users would message contacts globally without any cost. The SMS like feature gained attention and WhatsApp’s popularity and userbase began to grow.

Since 2009, WhatsApp has continued to grow and over the past 10 years, the success of the app has skyrocketed, boasting 1,5 billion active users. The app is used in 180 countries and is the largest of all messaging networks.

In 2014, Mark Zuckerberg acquired WhatsApp from Koum and Acton for the price of US$19 billion.

The WhatsApp story provides inspiration to several innovators around the world and gives insight that some of the large corporations around the world started small. Here are some ideas of small business ventures that can also evolve into large businesses;

In this article, Piggy focuses on the different types of businesses that can be set up. This includes a (i) sole trader, (ii) partnership and (iii) company (private/public).

Sole trader

Sole trader business owners are self-employed individuals that focus on a specific area such as plumbing, carpentry and hairdressing. Also, most freelancers such as photographers, designers and artists opt for this structure of the business. A sole trader business structure, with its ease of set up and full control, makes it an appealing business structure.

Advantages

Control and decision making: The main benefit of being a sole trader is that you are your own boss and you can dictate the direction of the business.

As a self-employed sole trader, you will be able to run your business as you wish. This is perhaps one of the biggest reasons why people leave employment to start their own business.

A sole trader has more freedom with decision making compared to a partnership structure, for example.

Keep all the profits: A sole trader keeps all the profits after tax from the business.  There is no need to share or distribute dividends to shareholders.

Easy to set up and low start-up costs: The process of setting up as a sole trader is much easier and more straightforward than setting up a limited company.

Disadvantages

There are of course also some disadvantages of setting up a business as a sole trader.

Unlimited liability: Essentially, a sole trader and their business are the same. Any business actions and debts are the responsibility of the owner. There is no protection of personal finances and assets, therefore being a sole trader can be more financially risky.

Less attractive to clients: Limited companies have a certain prestige that sole traders do not have. This prestige can help with attracting investors and clients as well as helping to create a professional image of the business. As a sole trader, it will be difficult to create that big business image that limited companies have.

Difficult to secure funding: As sole traders are seen to be riskier than other business structures, they are less likely to secure funding from traditional sources such as banks.

Partnership

A partnership is a type of business structure whereby two or more people pool their investment and knowledge to create a business. Like a sole trader, each partner would reap the benefits and rewards of the business, but also be responsible for liabilities and losses.

There are three types of partnerships to consider:

General partnership (GP)

All partners in a GP are involved in the day-to-day decisions and running of the business. The partners are personally responsible for the liabilities of the business and share profits based on their ownership.

Limited partnership (LP)

Some partners will be general partners as per the above and the other partners will be Limited partners which mean their personal possessions are protected from the company and general partners actions.

Limited liability partnership (LLP)

All partners are protected by the Limited Liability status, therefore not putting their personal possessions at risk should creditors be seeking payments.

Advantages of a partnership

A general partnership has low start-up costs and minimal administration;

Being able to split profits can be tax advantageous;

General partnership business affairs are confidential; and

Sharing the burden of running a business.

Disadvantages of a partnership

A general partnership has unlimited liability;

Risk of disagreements between partners;

Partners joining or leaving will require a valuation of the partnership assets which could incur additional costs with the accountant; and

Unlimited liability and restricted capital can stunt the growth of the business in the future.

Private limited company

A private limited company is the most common form of incorporation across different economies. It has a separate legal entity from its shareholders and directors. This means that personal assets are not at risk as the risk is limited to their investment. Liability would only be imposed on the director in the event of fraudulent or wrongful trading.

Advantages

Liability is limited to the investment made in the company

Directors are not bound by minimum wage, therefore benefiting from tax advantages

Improved reputation and credibility

The company name cannot be used by anyone else

Disadvantages

Company formation fees payable

Annual accounts and tax returns need submitting to regulatory bodies

Public limited company

A public limited company is registered under the Companies Act and its shares can be bought and sold on the stock exchange. Each exchange has its own listing requirements that must be met.

Advantages

Being able to raise capital by issuing public shares

Shareholders can sell their shares or buy more

Greater credibility and professionalism

Disadvantages

  • More regulation to follow
  • Full transparency required for shareholders and investors
  • Accounts must be audited on an annual basis by a qualified auditor which will incur additional costs

Chapter 5 of the Investor 101 Handbook covers the different types of businesses that can be set up in Zimbabwe. Download a copy of the book on www.piggybankadvisor.com

Matsika is the head of research at Morgan & Co and founder of piggybankadvisor.com. — batanai@morganzim.com/ batanai@piggybankadvisor.com or +263 783 584 745.

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