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How to choose the right structure for your business
Choosing the right business structure is one of the most important steps to starting a business. Your business structure will affect your legal and operational risk, legal costs, asset protection and tax obligations. The four most common business structures in Australia are: sole traders, partnerships, companies and trusts.
To help you decide on the right fit, we’ve outlined each of these four structures and how they allow you to operate.
Sole Trader
A sole trader is the simplest and cheapest business structure and allows you to manage and operate a business under your own name. This structure is best suited to tradies, contractors, entertainers, online stores, websites, home businesses, and other small businesses. In fact, most small business owners in Australia are sole traders. While it’s easy to set up and get going, it’s not very flexible and will not accommodate a rapidly growing business.
Partnership
A partnership is an association of two or more people who conduct business in partnership. This business structure is simple and relatively cost-effective, but there are a few drawbacks. All partners are jointly liable for the costs, debts and legal ramifications of the business, as well as the other partners’ actions, so you need to be careful who you go into business with. It’s important to have a partnership agreement in place, to dictate how the partnership operates.
Company
A company structure is ideal if you are looking to grow and scale your business. A company exists as its own legal entity, meaning all individual shareholders are only liable for debts or liabilities incurred up to the amount unpaid on their shares (usually zero). This limited liability is ideal for higher risk businesses.
Correctly structured companies also have options available to them to distribute its income in ways that can minimise tax and therefore maximise profits.
Companies can raise capital and grow via the issue of shares, which makes it perfect for startup businesses. If your company has multiple shareholders, you should have a shareholders agreement in place. All Australian companies must abide by their statutory obligations and Constitution, or Replaceable Rules as dictated by The Corporations Act.
Trust
A Trust can also be used to run a business. A trust has an individual or corporate trustee in control, and it is their job to distribute profits to any trust beneficiaries, per the trust deed. Trusts are therefore a good option for maximising profits by minimising tax.
If a trust has an individual trustee, this person is liable for any of the trust debts. If a trust has a corporate trustee, any shareholders receive protection through the company’s limited liability.
This trust is not appropriate if you want profits left in the business to help it scale because trusts must distribute any income or face taxation at the top marginal rate. A trust should have a unitholders agreement in place if it’s a unit trust, and a shareholders agreement in place if it has a corporate trustee.
Consider levels of ownership and control
Choosing the right business structure will help you manage the level of ownership and control you desire and require. Before starting a business it’s always best to engage a lawyer to ensure that any documentation governing your business is executed correctly and issues accurate control and ownership distribution among all parties.
Still not sure what business structure is best for you?
Avis & Funk Law offers tailored legal advice for businesses and individuals. Our legal team can help you choose the right business structure for your needs and draw up the relevant paperwork. Ready to set yourself up for success? Give us a call or get in touch online.
