Choosing the right structure for your business is an important decision when setting up a new business. There is no ‘one size fits all’ solution and often, choosing the right structure would depend upon number of factors, for example;
– the type of business you have,
– the number of owners/people involved in business,
– whether you plan to hire employees,
– how much income you expect business to bring,
– how you plan to grow your business in the longer run.
The costs and risks of each structure are quite different and you need to identify key factors and risk areas while selecting a suitable business structure. You need to consider time, money and the paperwork involved in setting up and managing a particular structure. The business structure you choose can have impact on;
– the risk exposure for owners
– the cost of managing the affairs & paperwork involved
– ease of funding the business operations
– succession planning
– tax outgo
– how much control you have over business
The four main business structures commonly used by small businesses are;
A sole trader structure is relatively easy and inexpensive to set up because there are few legal and tax formalities. As a sole trader, you are the sole owner and exercise all the control. As a sole trader, you can trade under your name or under a registered business name. If choosing to trade under a business name, you will need to register your business name with ASIC, and get an ABN. If your receipts are expected to be more than $ 75000, you also need to register for GST. The income you earn from the business is taxed in your hands, so you will pay tax on the business income at the same rate as individual taxpayers.
• It’s easy and involves low cost to set up
• As the owner, you have 100% control and keep all of the profit
• There’re less compliance and legal requirements
• The biggest disadvantage is; as the owner, you have unlimited personal liability. Your personal assets like home are exposed to business liabilities.
• Raising finance is much more difficult as compared to other structures say a company.
A partnership involves two or more people entering into business together and the income is received jointly. A partnership agreement outlines any; salaries, drawings, profit share, loan agreements, termination clauses, if new partners can be admitted, how records are to be maintained and how disputes will be settled etc. The partnership will need an ABN and its own tax file number. Each partner will pay tax on their share of the net partnership income.
• Risk is divided as more people share risk and responsibility
• There’s a broader skill set and management base
• It’s easier to raise finance with more partners
• Chances of business continuity are better as compared to sole trader
• Chances that disagreement can occur between partners
• Each partner is personally liable for business liabilities
• All partners are liable if one partner does something wrong in business
• Authority is divided amongst partners
• There are limits on partnership size
Company has a separate legal entity and has limited liability. It is regulated by Australian Securities and Investment Commission (ASIC). Companies trade in its own right and name distinct from its shareholders and directors. The company has shareholders (as owners) and directors (who run the operations). In small family businesses, shareholders and directors usually are same persons. Directors usually draw a salary and shareholders are paid dividends out of company profits. A company will need its own tax file number to lodge its own annual income tax return and it pay taxes on its income at separate rates applicable to companies. Directors can be asked to give personal guarantees to cover any debts incurred.
• Provides better protection from liabilities as business liabilities are limited to the company assets only and shareholders cannot be called upon to meet company’s liabilities beyond their shareholding.
• Ownership can be easily transferred
• It’s easier to raise finance for expansion
• Additional record-keeping requirements and other obligations
• Must publicly disclose key information
• Expensive to set up and maintain
• Owners can’t offset losses against other income
A family trust, or a discretionary trust, as it is commonly known, can be complex to set up and administer and is subject to extensive regulations. You should check with your solicitor or accountant on whether it suits your individual circumstances and needs. A trust can be set up with individuals as trustee(s) or with a company acting as trustee, who carries on the business on behalf of its beneficiaries. The later (with a corporate trustee) is, however, the most preferred structure due to its many inherent advantages. You will need to get an ABN and a tax file number in the trust name.
• Greater flexibility in income distribution, which can have tax benefits
• Limited liability is possible and greater asset protection
• A trust is awarded greater privacy than a company structure
• More compliance and legal requirements
• It’s more expensive to set up and run
• Powers are restricted to the trust deed
It is pertinent to note that one can change their business structures throughout the life of their business. As your business grows, you may restructure your business. However, there could be costs and tax implications involved.
We at AVS Business Services have helped a number of startups to get their business structures right at the beginning itself after carefully considering their circumstances and business needs.
If you are planning to start a business, buy a business or buy a franchise, Come talk to us, before you take your first step.
02 8824 4363
If you have any questions, feel free to ask them in the comments section. We will be happy to answer all your queries
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