There are a few business structures, so how do you know which one is right for you? Here are some details on each business structure and some advantages and disadvantages.
The different business structures are typically a Sole Trader, Partnership, Company, and there is also Trust. Choosing your business structure will be one of the most important decisions you will make as a new business owner.
What is a Sole Trader?
A sole trader business is operated by one individual and most small business owners operator using this business structure. Sole traders have complete control and legal liability for their business.
To become a Sole Trader you will need to obtain the following.
- ABN (Australian Business Number).
- Register your business name.
- Apply for any permits or licenses required for your industry.
- Open a separate bank account although it is not mandatory, just easier to manage so you can keep track of your business income and expenses.
- Obtaining relevant insurance is required.
- You have full control over your business and the decision-making.
- Easy to set up with minimum costs involved.
- You retain any business profits and assets and they do not need to be disclosed to the public.
- You can use your own personal tax file number (TFN) to lodge a tax return.
- There are no tax benefits
- There are no business partners
- Capital is difficult to obtain.
- Your personal assets can be used to pay the business debt as there is no distinction between business and personal assets.
- All your personal assets are at risk if there is any liability, profits, or losses as they cannot be split between family members.
What is a Partnership?
A general partnership is a business structure between two or more people. For example, a married couple, family members, or friends forming a business. They equally share the business’s income and losses and act on behalf of each other.
How to form a partnership?
Once choosing your business partner there are a couple of things you need to do.
- Create a business agreement that is written, signed, and documented.
- Apply for your ABN and register your business name through ASICS.
- Register for GST if the partnership is making over $75,000 in annual revenue.
- Apply for the appropriate licenses, permits, and insurance.
- Open up a bank account
- Partnerships are governed by a partnership agreement that is easy to administer
- Several people’s expertise and resources are combined
- Does not need to disclose any profits to the public
- Cheap registration and it’s easy to set up
- Capital raising is easy
- This business structure is easy to disband or sell
- Reporting requirements are minimal
- This business structure obtains benefits from taxation.
- Personal liability means that you’re responsible for all of the debts and taxes of your business. Since there is no distinction between business and personal assets, your personal assets can be used to pay business debts
- Shared responsibility for the actions and mistakes of other partners
- You’ll be taking joint responsibility for the business’s debts
- It’s difficult to change business structures
- Each year, partnership tax returns must be filed with the Australian Taxation Office (ATO)
- Partners are required to take responsibility for their own superannuation arrangements
- If your turnover is $75,000 or more annually, you must register for GST
- Separate tax file numbers (TFNs) must be provided
- Your business must have an Australian Business Number (ABN) to use for all business transactions
What is a Company?
A company is a corporate structure where you can create a separate legal entity. Therefore the company is its own legal person, separate from all its shareholders and officers. Due to Companies having their own legal personality they are able to sue, be sued, and owe debts.
Companies are incorporated under the Corporations Act 2001 (Cth) and are governed by the Australian Securities and Investments Commission (ASIC).
How to form a company?
- Decide whether you are going to set up the company yourself or use your accountant.
- Choose a name for your company and ensure its availability. You need to ensure the name of your company shows your legal status.
- You have to establish the rules that will govern the company.
- Decide on the company’s shareholders and directors.
- Determine how many shares each shareholder will own and the type of shares they will own.
- Register your company in your preferred state or territory and select the location of your registered office and primary business
- Lastly, you must complete the necessary paperwork and register your company yourself or through a service provider
- Companies are separate legal entities. A separate legal entity means a company exists separately from everyone involved or associated with it, including its owners and employees. Essentially, this works to protect you and your finances in the event of legal action being taken against your company. Companies have their own assets, obligations, and rights
- Shareholders are not liable for the company’s debts.
- Companies can enter into contracts as themselves.
- A company can trade anywhere in Australia and has a lower tax rate than the highest tax bracket for individuals.
- This business structure is ideal for businesses looking to expand and scale.
- The company has its own legal personality. As a result, generally, shareholder obligations are limited to the unpaid amount on their shares (which is usually zero).
- Due to limited liability, this business structure is most suited for businesses with high risks.
- Due to the company having its own legal entity, shareholders and members of a company are generally not personally liable for company debts given their limited liability.
- For startup businesses, a company structure is desired due to its ability to raise capital easily and grow through the issuance of shares.
- Companies are sold or dissolved easily.
- Companies enjoy advantages from tax.
- It has wider access to capital.
- Setting up a company can be difficult and expensive.
- Companies require a lot of administrative work compared to other business structures.
- Registration fees are high.
- It’s difficult to change business structures.
- Ongoing costs and set-up costs are higher for this type of business structure.
- The Australian Taxation Office (ATO) requires the annual filing of a company tax return.
- An annual review must be completed and a fee must be paid.
- A declaration of solvency is required of company directors annually.
- A Director Identification Number is required of all company directors.
- Tax and legal obligations must be met by companies.
- Your company must register for GST if it turns over $75,000 or more annually Non-profit organizations must register for GST if their turnover is $150,000 annually.
- ASIC must be updated within 28 days of any significant changes to company information.
- Financial records must be kept.
- As a director, you are responsible for knowing and complying with all your obligations outlined in the Corporations Act 2001.
What is a Trust?
In this business structure, a trustee can either be a company or an individual who holds the business for the beneficiaries’ advantage.
The trustee has full control and legal responsibility for the trust and its operation, including its losses and profit.
How to form a trust
There are a few steps to forming Trust.
- Firstly, you need to choose a trustee.
- Then a trust deed should be written.
- A settlor should settle the trust.
- Any stamp duty that applies must be paid.
- Limited liability means due to the company having its own legal entity member or shareholder liability is limited, and they’re generally not personally liable for the company’s debts.
- Raising capital is easy. Whenever a company asks its investors for additional funds, this is called capital raising.
- Tax benefits. The primary tax advantage of this legal structure is that trustees can distribute income, such as capital gains, from investments and business activities to beneficiaries in lower tax brackets (typically children or spouses).
- Asset protection. Assets are anything a company or individual owns that has economic value and is redeemable with cash is considered an asset
- Expensive registration compared to other business structures.
- Hard to set up.
- Changing or dissolving from this business structure once established can be difficult.
- Formal trust deeds describing the trust’s operation are required for this type of business structure.
- Trustees are required to perform formal administrative duties on a yearly basis.
- This legal structure is complicated.
- Its operations are legally the responsibility of the Trustee.
Now that you are familiar with the different business structures available and their advantages and disadvantages, you can select the business structure that best suits you. When starting a business brand new, it can help to hire a business coach to assist with the duties along the way and ensure your business is ready to grow after the setup. For more information, check out our business coaching programs or schedule a free 30 minute coaching call.
Shelley Langan – Live Life by Design