Photo Courtesy: Heather Ford collected from Unsplash
Starting a new business is an incredibly challenging move. The first thing that you need to decide before you start a business, is the business structure that you are going to adopt. It is crucial for the success of the business, that you have the correct information about the business structure that you are going to choose. This is the key to managing the challenges of a new business and getting the best outcomes.
The most common business structures are:
Sole trader
Partnership
Company
Trust
Each of these business structures has its legal ramifications. Therefore, you should take extra care to make this decision. It can be expensive to change business structures at a later stage. A well-informed decision to choose your business structure will help you to design the right strategies for success and to manage future challenges.
What do I need to know about different business structures?
Following are the key features of each business structure. It may help you to decide on the business structure that suits you the best.
1. Sole Trader/ Sole Proprietor-
A sole trader is an individual running a business. If you are going to operate your business as a sole trader, you will be the only owner with all responsibilities as well as profits of that business. You will have total control and management of the business.
Pros:
It will be quick and easy to set up;
You will have full control over the business and its assets;
It will be an easy process if you want to change the business structure in future;
Initially, it will have low tax rates;
Cons:
You will be personally responsible for business debts and liabilities. Therefore, your personal assets will be at risk;
Your business income will be taxed at your personal income tax rates. It will not be an ideal scenario for you if you receive other income apart from the business or your business income grows above a certain amount;
You won’t be able to employ yourself in the business;
You will be responsible for paying your workers’ and your super.
2. Partnership-
A partnership is a group or association of people who carry on a business and distribute income or losses between themselves. For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership.
Pros:
It will be easy and inexpensive to set up;
It will have limited reporting requirements;
The partners will share income, losses and control of the business.
Cons:
It will be difficult to add or remove partners or change the business structure in future;
Each partner will be personally responsible for the business debts; Therefore, your personal assets will be at risk;
You will be personally responsible for the actions and decisions are taken by your business partner;
3. Company-
A company is a legal entity separate from its directors and shareholders. In a company, the shareholders own the business, when the directors oversee and manage the business operations. It has a higher set-up and administration costs.
Pros:
It will involve simple processes to change the shareholders and directors;
The directors and shareholders will not be personally responsible for the business’s debts and liabilities;
Companies have a lower tax (corporate tax) rate at the moment than a higher income personal income tax bracket;
Cons:
Setting up a company will involve complex procedures;
Setting up and administration cost will be higher than the other business structures;
Companies also will have significantly additional reporting requirements;
Directors of the company owe various strict duties to the company (directors’ duties). They may be personally liable to the claims by the company or third parties if they breach their duties;
4.Trust-
A trust is created by an agreement called the trust deed. Under the trust:
the beneficiary/beneficiaries are generally entitled to the trust’s assets or income;
the trustee operates the business and holds the trust’s assets for the benefit of the beneficiaries.
A trustee is legally responsible for the operation of the trust. The trustee can be an individual or a company.
Profits from the trust go to the beneficiaries.
Pros:
The trust will be responsible for the business’s debts. Therefore, as a trustee, you will have protection over your assets.
The trust will be able to have the flexible asset and income distribution arrangements.
Cons:
Setting up a trust can be complex and expensive. A formal trust deed will be required outlining how the trust will operate.
There will be formal yearly administrative tasks for the trustee;
There will be significant reporting requirements for the trustees.
The above list will help you to understand and identify a suitable business structure. However, if you are planning to start a new business, we advise you to take accounting, business and legal advice to ensure that you are going to select the best structure for your business. If you need to find a lawyer to provide you with the best legal advice and help you to set up your business, please contact us at www.lawcircuit.com.au or call us on 0418631798 or email us at bonhi@lawcircuit.com.au