No matter your type of business, choosing the right business structure is crucial. The type of structure you choose will significantly impact the way you do business, and can be critical when it comes to important decisions down the track.
There are four common business structures to choose from, including:
- Sole trader: trading as an individual
- Partnership: trading with one or more people
- Company: a legal entity separate from its owners
- Trust: an entity that holds income on behalf of its owners
Business structures have implications for tax liabilities, asset protection and business responsibilities, so it’s important that you consider the right set up for your business.
In this article, we discuss the differences between each business structure, so you can set up your business for success.
Sole Trader
Sole trader is the simplest and easiest business structure. It consists of an individual trading under their own name. This structure is cheap and easy to set, however it lacks flexibility when it comes to growing your business.
The income of the business is treated as the person’s individual income. They are therefore solely responsible for any tax payable by the business. Sole traders are also responsible for their own superannuation arrangements.
The sole trader structure is most suitable for most small businesses, contractors, tradies and entertainers. The ATO offers great advice for individuals looking to run a business, here.
If you have plans of scaling the business and bringing on other owners or investors, a sole trader is likely not the right structure for you.
Partnership
A partnership is an association of two or more people who carry on a business as a partnership. A partnership is not a separate legal entity so all assets of the partnership are owned by the partners jointly.
Setting up a partnership structure is simple and cost-effective. Partners are jointly responsible for the debts of the business and each partner is equally liable for the other partners’ actions. It is therefore crucial to consider who you enter a partnership with.
If you have plans of scaling your business at some stage, a partnership may not be the right structure for you.
Company
Unlike a sole trader or partnership structure, a company structure is a separate legal entity and capable of holding assets in its own name. Individual shareholders of a company are only liable for debts or liabilities that the company incurs up to the amount unpaid on their shares (which is commonly zero).
Companies can be expensive and complicated to set up. There are generally more compliance obligations for a company which can increase set up and ongoing costs. If your company has more than one shareholder, you should have a shareholders agreement in place to avoid any pitfalls down the track.
Companies can raise capital, making it a popular structure for those who are looking to scale their business. If you have plans of establishing and growing your business, a company is likely the best structure for you.
Trust
A trust is a structure where a trustee carries out the business on behalf of the trust’s members (or beneficiaries). This structure is typically used for tax and asset protection. Trusts separate the control of an asset from the owner of the asset, which may be useful for protecting the income or assets of a young person or a family unit.
A trust is not suitable if you require profits left in the business to help scale as a trust must distribute income. If it fails to do so, the trust will be taxed at the top marginal tax rate of 49%.
Trusts can be costly to set up and complex to dissolve. It is critical to consider whether this is the best option before operating a business via a trust. Having a corporate trustee may be preferable due to the protection it affords from liability.
What structure is best for you?
Each structure has different upfront and ongoing costs. It’s important to consider which structure will have the best long-term benefits that align with your future goals.
Consider each option carefully, as there are key factors and rules to consider for each structure. You will need to think carefully about your specific type of business, its risk profile and plans for growth.
Always seek legal advice
Entering a business is exciting and equally as daunting. Finding a trusted professional who can assist you throughout your business journey will ensure your business can thrive.
The Cameron Rogers team are experts in all types of commercial law. If you’re not sure which structure is right for you, reach out to us for an obligation free consultation now on 07 5445 1213 or book a consultation.
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