Choosing the Right Business Structure for You

Starting up a business involves many important decisions that need to be made. Selecting the right business structure is one of them, and of one of the various ways Prominent Lawyers can assist. Starting up can be a difficult process, nevertheless it is a very critical phase, as the choice you make can impact taxes, paperwork, employee structure, profit distribution and more. This consideration can often be overlooked. However, it is important to be aware of the many types of business structures and find the one that is going to be most fitting for your business requirements.

A business structure determines many key criteria within your business, such as; personal liability, ongoing costs and paper work, licenses you may require as well as whether you’re considered an employee or owner of the business. These factors should be taken into consideration when making a choice.

Outlined below are some of the main business structures as well as key aspects of each, prepared by the Commercial Law team at Prominent Lawyers:

Sole Trader

A sole trader is an individual person who is legally responsible for all facets of the business. It is intended for business owners who are the sole administrators of their companies.

A sole trader has key advantages and disadvantages that should be noted:

• It is the simplest and least expensive option

• It allows the business owner to have full control of the assets as well as business decisions

• The business owner may employ people to help with business operations. However, there are obligations they need to comply with

• A change in business structure is possible if the business grows

• The business owner is not considered an employee. They receive pay, but it is not noted as wages for tax purposes

• A sole trader has unlimited liability which means all personal assets are at risk if something was to go wrong. Personal assets can be detained to recover debt

• Losses by business activities may be balanced against other income earned such as investment income or wages

Company

A company is a separate legal entity from its shareholders, unlike a sole trader/partnership. Many people consider using this company structure when either starting up or expanding a business.

• A company is a more complex business structure with higher set up fees and administrative costs. These costs include annual statements, keeping key government organisations informed of any changes relating to structure, operations and any fees for accounting/legal services

• A company has limited liability compared to other structures. This means that in most cases the personal assets of shareholders cannot be seized to pay company debts

• A company needs to be registered under Australian Securities Investment Commission and comply with obligations under the Corporations Act 2001

• Once a company is registered in one state of Australia it is possible for them to trade in all states

• A company structure allows continuity of the ownership and management of the business. This could be in a case of death, sickness or disability. The structure allows shares in the companies to be transferred therefore promoting permanency

• Directors within a company have certain legal obligations. If directors fail to meet these, they can be held personally accountable for debts and liabilities of the company

Partnership

A partnership involves going into business with multiple people with a shared income. This highlights shared control and management between the partners.

• This structure is quite simple and less expensive to set up

• The partners are liable for debts incurred by the other partners

• Partnerships have unlimited liability similar to a sole trader

• A partnership requires a separate tax file number as well as a partnership tax return to be lodged with the Australian Taxation office

Trust

A trust is not so much an organisation but a legal structure which holds assets. They handle everything from family inheritance to funding political activities. The trustee is legally liable for the debts of the trust and may use its assets to meet those debts.

• It is a complex legal structure involving higher costs than a sole trader or partnership

• A trust is flexible for tax purposes

• A trust provides asset protection and limits liability from operating the business

• It is simply procedure where a Trustee manages assets. If you trust your business to a Trustee, it will act as a manager of the business making decisions, distributing funds and paying bills

Understanding these as the foundation of your business set up accounts for the long-term performance of your business. For this reason, it is essential to establish your business with the most ideal structure, from the get go.

To find out more about establishing your business, read more here and contact our Commercial Law team to assist on 1800 77 66 46.