What business structure is right for you? If you’re starting your own business, it’s likely you’ve asked yourself this question.
Should you register as a sole trader or a company? What’s a partnership business? How does a business trust work?
Here, we explore the pros and cons of all the different structures to help you decide which one is right for you.
There are so many important decisions you need to make before entering the world of entrepreneurship. Discovering what your purpose is, uncovering the path you need to walk to success and how to achieve your life’s best work are all essential, but there’s another element to consider that’s just as important.
This decision will determine how much tax you pay, how many employees you hire, the amount of paperwork you do, the degree of personal liability you face, how much money you can make – the list is almost endless.
Only your individual circumstances and a well-thought-out decision-making process will determine what structure is right for your business.
There are six structures:
1. Sole trader
6. Incorporated association.
Sole trader, partnership, company and trust are the most commonly used systems in Australia and also the ones I’ll be exploring in more detail in this article.
As we go through them, think about which one is right for what you want to achieve. Remember, if you want a greater understanding, doing some further research and speaking to a lawyer would be the next step.
As the easiest to manage and the least expensive to run, the sole trader structure has a variety of amazing benefits. As the name implies, sole traders are often run by one person, so if you like being your own boss and aren’t ready or interested in the responsibilities of managing a team, this could be a good fit.
You can trade under your name or a registered business title, but you need an ABN number regardless.
According to Schweizer Kobras Lawyers & Notaries, there’s no difference between the person and the business, so all liabilities of the company are also those of the individual.
You’re also not considered as an employee, so the benefits of payroll managing your superannuation and tax payments are non-existent, however, this can change depending on your growth.
A partnership is where two or more people go into business together and share in the profits and the losses of the enterprise. Partnership structures come in two varieties – general partnerships and limited partnerships.
A general partnership is where all the partners contribute to the day-to-day management of the business. The limited version, on the other hand, elects one general partner to control the company’s daily operations. The remaining partners play a more limited role with reduced liability.
The main advantage of a partnership structure is the contribution from multiple talented people and the risk-sharing element. Schweizer and Kobras advise that a written agreement is essential to avoiding partner disagreements, so make sure there is a written document that identifies each partner’s role in the business, profit sharing, their expected financial contribution and processes for dispute resolution.
Unlike a sole trader or partnership structure, a company is a legal entity separate from its owners. This means it trades, receives debt and can be sued in its own right, liberating shareholders and directors of this liability.
A company structure is also easy to understand, enables you to raise significant capital, can carry losses indefinitely to offset against future profits and can use the surplus to reinvest in the company or be used as dividends
However, this structure requires significant set-up and maintenance costs, not to mention complex reporting requirements and losses that can’t be distributed to its shareholders.
A family trust, or a discretionary trust, is a similar structure to that of a company. There’s a limited degree of liability and a good deal of flexibility around income distribution, however, like a company, trusts are also costly to set up and manage.
Powers are restricted to the trust deed and there’s more compliance and legal requirements, while losses can’t be distributed.
This being said, increased tax benefits and asset protection are a major advantage.
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