Deciding on the legal structure of your business is an important step - maybe the most important step - in building the foundation for your business's future. What do you want it to be? How much control do you want to have? How much liability? How do you want to be viewed by the government? In this article, we'll provide a brief overview of the main types of structures.
Sole Trader
Sole trader is the simplest and most inexpensive business structure, and with few legal requirements, you'll find it easy to maintain. The good news is, as a sole trader, you have one hundred percent control of your business. You don't need to separate your business and personal financial accounts, and you'll pay personal tax rates on your earnings. You don't even need to pay payroll tax! You're the boss, and you keep all the profits.
Of course, this is also the bad news. If something were to go wrong, you are completely responsible and have unlimited personal liability. Because of this, sole traders may have a more difficult time raising finances to support business expansion. Sole trader may be a good place to start your business, though, as the legal structure is easily upgraded when you grow.
Partnership
In a partnership, you and another (or several others) run a business together. You'll share profits and responsibility in the business, but you are not a company. While you will most likely have to give up at least some control of the business, you will also have partners with whom you can share potential losses. You'll set up an agreement or contract that sets the parameters of the partnership: salaries, profit sharing, termination clauses, etc. A partnership is not a legal entity on its own, so you'll pay taxes on your share of the net income.
Trust
A trust is also not a separate legal entity and is often used for family businesses. A discretionary trust is used for one family, and a unit trust is used for a multiple family trust. In this business structure, a trustee is placed in charge of property or assets and runs the business with little or no input from the beneficiaries. A trust offers more privacy and income distribution flexibility than a company, but is more complicated and expensive to set up and operate than a partnership. Only profits, not losses, can be distributed and generally, the terms of a trust cannot be changed. You will still have liability and asset protection, but the deed is not unlimited and must be reinstated over time.
If you would like to start a trust and are looking for assistance, we have expert partners who specialise in getting you up and running.
Company
A company is the most complex business structure to set up and maintain, but it does have many advantages. For example, liability is often limited to the actual assets of the company itself, because it is a separate legal entity. A company must be incorporated and registered with the Australian Securities and Investment Commission (ASIC), but once your company is established, ownership is much easier to transfer. In addition to providing liability protection to everyone involved, a company business structure conveys greater authority to customers and potential investors.
While there are many benefits to this structure, if you're concerned about privacy, a company is public and important information must be made transparent to the public at all times. Control is restricted by constitution and shareholders, and since the company is its own entity the tax implications are more complex.
Business structure is definitely something to consider when you're thinking about starting or growing a business. Business ownership is an exciting and challenging undertaking, so make sure you have the reliable assistance of experts and the tools you need to be successful!
