Starting a new business is not as easy as hanging out a shingle. In Bermuda's sophisticated business environment, one of the most important decisions in making the business a success is choosing the right legal framework.

This is often a very difficult decision for people when they are inundated with other important decisions like the development of a business plan, the hiring of employees or the securing of adequate financing.

In the case of many start-ups, consideration should be given to selecting a legal structure that is safe, cost effective, simple and highly functional.

Today, I hope to provide you with a starting-point for a more detailed and comprehensive discussion.

Forming a partnership is a viable option for anyone deciding to start a small business. A partnership is a relationship, created between persons intending to carry on business. The terms of this relationship are detailed in the partnership agreement, where the parties should agree on issues like the financial contributions of the partners, the distribution of profit, the purpose of the partnership, the responsibilities of each partner, and how the partnership should be terminated.

The partnership agreement is a contract, which becomes effective only after the partners have agreed to its terms. Therefore, the drafting of the partnership agreement can be used to focus the minds of the partners, ensuring that they "buy into'' a common vision of how they wish the business to be structured.

It is this decreased level of formality (when compared to companies), that is the major advantage of choosing this form of business structure.

Partnerships are relatively simple, inexpensive and flexible and may be ideal for entrepreneurs who are feeling a little overwhelmed.

However, a disadvantage of a partnership is that it does not have a separate legal identity. This means that the partners may be held personally liable for the debts of the partnership. Although, for all practical purposes, a partnership may function as an "entity'' and may sue and be sued and carry on business in its own name, it can expose the partners to this very frightening prospect.

An alternative form of business structure is the limited liability company.

Several types of companies may be incorporated in Bermuda, however today I will focus on the local company. Broadly speaking, local companies are required to have at least 60 percent Bermudian ownership, and at least 60 percent of the directors must be Bermudian as well.

It is a common perception that a business is best operated through a corporate framework. Certainly, using a company is a very effective business method and many of the Island's strongest commercial institutions take this form.

However, entrepreneurs should not decide to form a company before asking themselves if it is the best way to manage their resources and whether the perceived benefits can be realised.

Some benefits of forming a company include the ability to raise money through the sale of shares, structured management through the appointment of directors and a formal framework detailed in the Companies Act 1981.

A key advantage of forming a company is its separate legal identity. Unlike partnerships, shareholders (owners) are only liable for the debts of the company to a value equal to their respective shareholdings, which in the case of a local company, can be as little as $12,000. Through this structure the personal property of each shareholder is protected.

Unfortunately, this protection is often removed when the shareholders are asked to sign a guarantee as a condition of a bank loan. The end result is that the individual shareholder's personal property is placed at risk (as with a partner), if the company does not make its loan payments. This removes the protection that is otherwise extended through the use of a corporate structure and eliminates one of the most alluring benefits of an incorporate entity.

The operation and management of companies can prove to be both expensive and complex. They are governed by the Companies Act, which details a set of rules to be closely followed. Making sure that your company is kept up to speed can be costly. Additionally, local companies are charged government fees.

Choosing the right form of organisation for your business plan can be confusing. However, up-and-coming entrepreneurs should keep in mind that the best legal structure takes into account the individual needs of the business.

This may be just the right prescription for success.

Attorney Travis Gilbert is a member of the Company Department at Appleby Spurling & Kempe. Copies of Mr. Gilbert's columns can be obtained on the Appleby Spurling & Kempe website at www.ask.bm.

*** This column should not be used as a substitute for professional legal advice.

Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.