BUSINESS FORMATION

​The Legal Format​

When setting up a new business you will need to decide what legal format you want to operate under. This is one of the most important decisions you need to take at an early stage as this will determine how you will operate your business in the future.

To determine what legal format is best for you, you need, first of all, to understand some of the basic differences. The most common legal formats for businesses are:

 

  • Sole Trader
  • Partnerships
  • Private Limited Liability Companies
  • Cooperatives

 

Sole Trader

Sole Traders need to register with the Employment and Training Coporation as self-employed. These can start trading straight away as long as the required permits and registrations are carried out.

 

Liability
If the business fails, then the owner is fully responsible for all the business debts.
Management ​The owner is solely responsible for controlling the business. The owner’s word is final.
Finance ​Normally, the owner's personal money.
Profits ​All profits go to the owner
Taxes​ ​Self-employed status. Even if the owner does not draw on the profits they are still taxed. Losses can be offset against tax on other income.
 
Partnerships

Partners need to register with the Employment and Training Coporation as self-employed. You should seek the advice of a lawyer and form a 'Deed of Partnership'. Partnerships can start trading straight away as long as the required permits and registrations are carried out.

 

Liability If the business fails, then the owners are fully responsible for all the business debts.
Management ​The partners share responsibility for controlling the business.
Finance ​Generally, the partners’ private funds provide the Company’s finances.
Profits ​All profits are shared between the partners (as agreed within the 'Deed of Partnership').
Taxes ​Self-employed status. Even if the partners do not draw on the profits they are still taxed. Losses can be offset against tax on other income.
  
Private Limited Liability Companies (Ltd.)

Companies cannot just start operating but need to follow a predefined process of registration and set-up (Business Registration). It should be noted that a Company is a legal entity in its own right.

 

Liability​ The shareholders' personal assets are protected if the business fails (Limited Liability). The shareholders can only lose what they have put into the business.
​Management ​The business is controlled by the Board of Directors. Each director is held personally responsible for its management and must act in the Company's best interests.
Finance​ ​Generally, the shareholders’ private funds and/or bank facilities provide the Company’s finances.
​Profits ​Dividends are paid to the shareholders.
​Taxes ​The Company pays taxes on its profits. All employees and directors pay taxes on income earned through wages, salaries or other forms of remuneration.​

Cooperatives

A co-operative is a business entity and all its members (shareholders), who may also be its employees, own the co-operative. A co-operative society cannot just start operating but needs to follow a predefined process of registration and set-up. It should be noted that a co-operative is a legal entity in its own right.

 

Liability​ The members’ personal assets are protected if the business fails (Limited Liability). The members can only lose what they have put into the society.
​Management ​The business is controlled by a committee of management (directors). Each committee member is held personally responsible for its management and must act in the Co-operative’s best interest.
Finance​ ​Generally, the members’ private funds and/or bank facilities provide the Co-operative’s finances.
​Profits ​Partonage refunds may be paid to the co-operative members in proportion to the volume of business or other transactions afforded by each member with the Co-operative society. Other forms of surplus distributions may also be made.
​Taxes ​Co-operatives are exempt from tax. However, a 5% annual contribution on the annual net surplus is paid to the Central Co-operative Fund, which Fund is used in furtherance of co-operative education, training, research, and for the general development of all the co-operative movement in Malta. Net surplus distributions to co-operative members attract a final withholding tax. All employees and committee members pay taxes on income earned through wages, salaries or other forms of remuneration.​