To give your business the best chance at profitability and success it is essential that you carefully choose a business structure that best suits its needs. Depending on these needs, your choice of business structure may have a positive or negative impact on continued costs, tax liabilities, the level of protection afforded to various assets and your personal liability.
Types of Business Structures
The most popular business structures utilised by Australian businesses include:
1. sole trading;
2. companies;
3. trusts; and
4. partnerships.
1. What is a Sole Trader?
A sole trader is an individual business owner who is legally responsible for every aspect of the business.
Sole traders have relatively low business expenses and few reporting requirements. They usually make all the decisions in regards to the day-to-day running of the business. Additionally, being a sole trader without any employees presents no obligation to pay payroll tax, superannuation or workers compensation insurance on income made.
Although these pros may seem attractive, being a sole trader can have numerous downfalls. For example, a sole trader is exclusively responsible for any debts or losses incurred by the business. Consequently, any personal assets the sole trader owns are at risk if the business incurs liabilities.
So, when may you want to operate as a sole trader? If you wish to work alone then choosing to be a sole trader may satisfy your new business’s needs. Nonetheless, it is important to remember that every business venture is different and thus your circumstances will dictate if this business structure is appropriate.
2. What is a Partnership?
A partnership is an association of two or more partners engaging in business together with a view to making a profit.
Choosing a partnership structure is often appealing due to the low startup costs, larger borrowing capacity and opportunity for tax savings. However, it is essential to note that all partners in a partnership are jointly and severally liable for the debts of the partnership. This means the careless act or decision of one partner can negatively impact all of the partners.
You may choose to enter a partnership because you want to run a business with another friend or acquaintance. If you are contemplating entering a partnership, we recommend you obtain advice from a lawyer to ensure it is the correct structure for your business venture due to the liability it may expose you to.
3. What is a Company?
A company or a corporation is a separate legal entity that is capable of holding assets in its own name. A company comprises of shareholders whom own various numbers of shares in the company and directors who manage and make decisions about the company’s activities. A company is more expensive to set up and administer due to various registration obligations, reporting requirements and legal rules outlined in the Corporations Act 2001 (Cth) which are imposed by the Australian Securities and Investment Commission (ASIC).
So why do people find company structures attractive? Companies are attractive as the debt of the company is not considered that of its owners. Therefore, if you organise your business through a company structure you are not putting your personal assets at risk.
4. What is a Trust?
A trust is a structure in which a trustee holds assets on trust for the benefit of the beneficiaries. The trustee can be one or more individuals or a company and is responsible for managing the assets of the trust. The trustee is legally liable for any debts incurred by the trust and is able to distribute profits of the trust to the beneficiaries.
A trust is often seen as a tax effective way to run a business. However, effectively setting up a trust is an intricate process that requires thorough consideration and advice. Assessing whether a trust is the adequate business structure for a business is highly dependent on the business’ purpose and needs.
Changing Business Structure
You may wish to change your business structure throughout the life of your business due to increased growth, change of ownership, the introduction of a new partner or variation to the operational aspects of the business. You are able to restructure your business however you must consider any tax implications and regulatory obligations of a business restructure. This is why we recommend you receive professional advice from a lawyer experienced in commercial and corporate law to ensure that legal and tax issues of your business restructure are identified and resolved in the process and that such business restructure meets the needs of your business moving forward.
If you would like advice about what business structure would be suitable for your future business plans or wish to restructure your business, please call Frichot & Frichot on (08) 9335 9877 or complete the form below to request an introductory consultation.
